Monetary policy responses to Tariff shocks: Lending facilities as a complementary tool

Amid rising global trade tensions and repeated tariff shocks, particularly during the U.S.–China trade conflict, China's export sector has faced growing external pressure. In response, the People's Bank of China (PBoC) has increasingly relied on unconventional monetary policies to stabilize the economy. This paper focuses on the Medium-term Lending Facility (MLF) to assess its effectiveness in mitigating external tariff shocks.、Using monthly data from 2005 to 2023 and a vector autoregression (VAR) model, this study analyzes the relationships among tariffs, net exports, monetary policy tools, and consumer prices. The results show that tariff increases significantly reduce net exports and create deflationary pressures, exposing the vulnerability of China's external sector to trade policy uncertainties. On the other hand, MLF injections positively impact net exports, though with a delay, by improving credit access and strengthening firm resilience. However, MLF’s direct effect on inflation is weak and statistically insignificant, suggesting limited influence on consumer prices. These findings highlight the targeted yet constrained role of MLF operations in addressing trade-related shocks. Therefore, traditional money supply instruments need to be adjusted to maintain the inflation target. These findings highlight the role of targeted liquidity support in buffering external shocks for export-oriented economies and underscore the need for complementary demand-side measures and institutional reforms to enhance policy effectiveness. • This study investigates the role of China’s Medium-term Lending Facility (MLF) in mitigating the negative impacts of external tariff shocks on trade and macroeconomic stability. • Using monthly data from 2005–2023 and a VAR framework, we find that tariff hikes significantly suppress net exports and create deflationary pressures. • MLF injections provide targeted liquidity support, easing firm-level credit constraints and facilitating export recovery in the medium term. • The impact of MLF on consumer price inflation is weak and statistically insignificant, highlighting the need for complementary monetary measures to maintain price stability. • The findings offer novel insights into the effectiveness of unconventional monetary tools in export-oriented emerging economies facing trade policy uncertainty.