Using a structural vector auto-regression (SVAR) model which contains four variables, the actual money supply, the real interest rate, the exchange rate and the real national income, to estimate the effect of china's monetary policy from 1995 to 2009. With the vector autoregressive analysis, Johansen Co-integration Test, Granger causality test and impulse response analysis based on China's quarterly data of these variables used in our model, we find that the effect of the monetary policy in china is much more effective in the short-term than in the long-term. The effect of real interest rate on the real exchange rate is in a low level, but has a negative impact on the output; the real exchange rate has a negative impact on the real output too. According to these features, continuing carrying out the interest rate liberalization and appropriately loosening the fluctuation of the exchange rate, will strengthen the effect of the monetary policies in china.
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