Research On The Control Performance Of Monetary Policy Instruments

Monetary policy instruments are important parts of the execution and transmitting monetary policy intentions. The central bank’s choice of monetary policy instruments to a great extent affects achieving the goals of monetary policy and the effect of policy implementation. In practice, People’s Bank of China uses quantitative instrument more frequently, the price instrument with indirect control mode takes second place. As an emerging economy of developing countries, China is in a special period of economic system transition, economic and financial environment is undergoing profound changes. On one hand, the shadow banking system is developing rapidly in China, financial disintermediation gradually reveals, which reduces the measurability and controllability of money supply, and Interferes with the control effect of traditional quantitative instrument. On the other hand, Interest rate marketization reform gradually carries out in China, the sensitivity to interest rates of microeconomic unit is enhancing, flexible interest rates instrument is plays a positive role in the macroeconomic control. So whether the current control mode of monetary policy instruments is suitable for the new macro environment? It is suspectable that whether quantitative instrument is still optimal. The effectiveness and disadvantages of different monetary policy instruments become the focus of controversy. This subject is urgent but has great significance that we are facing.The significance of the paper can be reflected in three aspects. First, the paper makes quantitative research on the broadly-defined Liquidity which derives from the credit creation mechanism of shadow banking system, and affects money supply, brings impact and challenge for monetary policy control. Measuring the scale of shadow banking system and broadly-defined Liquidity is to provide theoretical basis and practical reference for financial regulators in China. Second, systematic standardization research and analysis of the paper is based on DSGE model framework with microcosmic basis, which provides a relatively unified theoretical framework to compare the control performance of different monetary policy instruments. Economic and financial data for empirical analysis covers nearly two decades, which reflects the latest changes of the economic and financial environment in China, making the conclusion has practical guiding significance. Third, the paper carries on a comprehensive evaluation of different monetary policy instruments under the background of finance disintermediation and interest rate marketization reform, which has far-reaching significance for enriching the theoretical study of central bank monetary policy in China, and has positive significance and application value for rational selection of monetary policy instruments, improving macro-control of monetary policy, and guiding monetary policy operation practice.The paper is composing of seven chapters. Main contents and structural arrangement are as follows:Chapter One:Introduction. This Chapter elaborates the research background and significance, research ideas, and basic framework of the paper, summarizes the paper’s research methods and innovation, and briefly introduces and reviews on the related literature.Chapter Two:The analysis of influence factors of China’s monetary policy instruments under the background of financial disintermediation. This chapter expounds the meanings and characteristics of shadow banking system and interest rate marketization, analyzes the impacts of them on monetary policy instruments, transmission mechanism and final goals from the theoretical point of view, and concludes the relationship between them.Chapter Three:The scale measurement of shadow banking and broadly-defined Liquidity in China. Combining with the particularity of Chinese shadow banking system, this chapter introduces the concept of Non-observed Loan, using the national economic accounting and financial statistics analysis method to measure the scale of shadow banking and broadly-defined Liquidity in China.Chapter Four:China’s interest rate marketization reform process and the measurement of equilibrium interest rate. This chapter clarifies the necessity of interest rate marketization reform in China, reviews the history of China’s interest rate marketization reform process, and measures the equilibrium interest rate in China using the state space model.Chapter Five:New Keynesian monetary policy DSGE model framework. This chapter further studies DSGE model theoretical foundation, main characteristic and estimation method, makes detailed interpretation of the classical framework of New Keynesian monetary policy DSGE model—SW (2003), which lays on theoretical model basis for later empirical analysis.Chapter Six:Control performance analysis of China’s monetary policy instruments based on DSGE model. This chapter constructs control performance analysis model of China’s monetary policy instruments within the framework of DSGE model with micro basis, makes policy simulation analysis using parameters calibration, Bayesian estimation and impulse response, and points out control effect differences of quantitative and price instruments under the background of financial disintermediation.Chapter Seven:Conclusion and policy space. This chapter summarizes the main conclusions of the paper, and puts forward targeted policy Suggestions combined with the actual situation of China.The paper makes innovative efforts in the following five aspects:First, from the point view of research perspectives, the paper studies the control effect of monetary policy instruments in China under the background of financial disintermediation, which takes the influences of shadow banking system to monetary policy instruments as the main clue. Furthermore, the paper combines with the actual situation of interest rate marketization reform in China, and takes the influences of interest rate marketization reform to monetary policy instruments as the auxiliary clue. The analyses are fit the present reality of China and have more practical significance.Second, based on the particularity of Chinese shadow banking system, the paper introduces the concept of Non-observed Loan from the perspective of credit demand (borrowers), using the national economic accounting and financial statistics analysis method to measure the scale of shadow banking in China. Also, the paper estimates the scale of broadly-defined Liquidity in China, drawing lessons from Andrew Sheng (2011) which defined on M5.Third, basic pattern of interest rate marketization reform in China has initially formed. The paper estimates equilibrium interest rate using state space models.Fourth, to compare the control performance of quantitative and price instruments, the paper builds the following three models:control performance analysis model of monetary policy quantitative instrument based on M2 (Model Ⅰ), control performance analysis model of monetary policy quantitative instrument based on broadly-defined Liquidity (Model Ⅱ), and control performance analysis model of monetary policy price instrument based on broadly-defined Liquidity (Model Ⅲ). Also, the paper makes policy simulation analysis using parameter calibration, Bayesian estimation and impulse response, which is the focus and difficulty of the paper.