Hence all shocks influence the time path of the price level, which is consistent with the theory
developed by Clarida and Gali (1994). Note that the specific policy variable like monetary policy
is not included in the model. Instead, a nominal shock is identified through the effect it has on a set
of key macroeconomic factors. This seems appropriate for China, where it is difficult to identify a
stable monetary policy instrument, as the interest rate has been almost fixed.