The Dynamic Econometric Studies On Monetary Policy Based On TVP-VAR Derived Model

Monetary policy plays an important role in macroeconomic control through adjusting threeconventional monetary policy tools: the legal deposit reserve rate, rediscount rate and openmarket operations. Monetary policy can maintain monetary market stability of a country orregion, through inverse cycle regulation, and then promote steady and rapid development ofnational economy. The financial crisis triggered by subprime mortgage swept across the world in2008. Consequently, expansionary monetary policies have been taken in all countries in order toprevent from being mired in recession. Due to the limitation of zero lower bound, the marginalutility of inverse cycle regulation by monetary authority was diminishing. So the creditexpansion function of the whole financial system also gradually lost the desired effect. Forvarious reasons, monetary authorities implemented unconventional monetary policy universallyrepresented by Quantitative Easing Monetary Policy. In order to eliminate the spillover effect ofconventional monetary policy, China’s monetary authority has also implement a series ofunconventional monetary policy frequently in recent years. The actual economic effect and tie-inuse of are becoming particularly important. In the meantime, the financial crisis made thecriterion “To ensure a stable price level can ensure the entire financial system stable” abandonedby national regulators from all countries. Because asset price fluctuations have an impact on thestability of money market and financial system, the researchers pay more attention to solving theproblems of asset price fluctuations and monetary policy. With the development of China’scapital market and the deepening of financial structure, the coupling relation between asset priceand macroeconomic are becoming stronger. In-depth analysis of the coping strategy to theinfluence of Chinese asset prices on macro economy and monetary policy on asset pricesvolatility will surely become more and more urgent. In addition, in the new financialenvironment, the stability of price levels just the necessary instead of sufficient condition forfinancial stability. In order to maintain the stability of money market and financial system, themonetary authority should take a macro-prudential view of the financial sector from multipleperspectives and multiple levels. This makes it imminent that building index system, whichreflects actual money market operation comprehensively, and identifying the financial stability.Based on the above practical problems, this paper uses the latest econometric analytical methods in the basis of theoretical analysis.Chapter2uses a time-varying parameter vector autoregressive model (TVP-VAR) topresent an analysis of the dynamic transmission response mechanism under the impact ofmonetary supply shocks for China’s monetary policy. It concludes that the effect of monetarysupply shocks on the monetary policy transmission mechanism in China shows an obviousnonlinear feather. However, TVP-VAR model can describe the time-varying feather of themonetary transmission mechanism in China. As time goes on, the monetary authority willgradually weaken administrative interventions when regulating monetary policy, and monetarysupply will be driven by output gap instead. Along with China’s financial system improving andperfecting, whether it is considered basing on a time-period dimension or a time-point dimension,the influence of policy instruments on monetary policy transmission mechanism under monetarysupply impulse will gradually change, impact strength enhancing while response time decreasing.The expansionary monetary policy of increasing money quantity has real effects in the short term,which can significantly affect the real interest rate and the level of output. But in the long term, itlacks a permanent impact on the real interest rate and the level of output.Chapter3studies the effectiveness of unconventional monetary policy based on atime-varying parameter vector autoregressive model with sign restriction (S-TVP-VAR). Theresults show that the application of S-TVP-VAR improves the effect of simulation estimation. Asthe representative of overall macro-factor shocks, aggregate supply and demand shocks are themain impact source of the level of output and price. The impact of aggregate demand shock onthe macroeconomic is greater than that of aggregate supply shock. The analysis of impulseresponse and variance decomposition shows that, the impact of interest rate shock as therepresentative of conventional monetary policy shock on the level of output and price, is greaterthan that of signal and balance sheet shock as the representative of unconventional monetarypolicy shock. Conventional monetary policy continues to be the preferred means of the monetaryauthority. Comparing the effects of unconventional monetary policies, balance sheet channelrelative to signal channel has more significant impact on macroeconomic. Since2009, theinfluence of unconventional monetary policies, like balance sheet channel and signal channel,gradually increased on money market and macroeconomics trend over time.Chapter4is based on LT-TVP-VAR（Time-Varying Parameter Vector Autoregressive Modelwith Latent Threshold）. Such a model examines the dynamic linkage between the U.S.unconventional monetary policy shock and the response of the term structure of interest rate(TSIR) in China currency market and bond market. The result indicates spread exerts moreinfluence on TSIR on currency market than bond market，since currency market owns moreopenness and liquidity than bond market. For Chinese currency market，no matter the U.S. shockcomes in a way as unconventional monetary policy or conventional monetary policy，they all bring similar impact on China s currency market: short-term interest rates go down; middle-termrates get up and long-term rates drop off. Furthermore, for Chinese bond market, whatever theshock from U.S. come in terms as unconventional monetary policy or conventional monetarypolicy，they all make short-term interest rates rise; middle-term and long-term rates fell in bondmarket. TSIR’s impulse response can be examined in the light of latent threshold spread inChina’s Currency market or can be considered in the light of Single Spread on China’s bondmarket. However, both markets show the unconventional monetary policy measured by latentspread put more effects on the TSIR in China’s financial markets than those brought byconventional monetary policy measured by nominal spread. Moreover, the reactive sensitivity ofChina’s currency market and bond market also depends on which type of forward guidanceundertaken by Federal Reserve in each time period.The conventional monetary policy measuredby nominal spread affected TSIR in China’s currency market and bond market before the globalfinancial crisis, but, after financial crisis, the unconventional monetary policy measured by latentspread put effects on the TSIR in China’s currency market and bond market are becomingincreasingly clear.Chapter5uses the Latent Threshold Factor (LTF) model to study the common factors of thenational legal currency exchange rate fluctuations closed to China’s trade and finance. Then, byusing Generalized Autoregressive Score model (the GAS) driven by the time-varying factor, westudy the time-varying correlation characteristics of RMB and currency exchange ratefluctuations associated with RMB in different markets. Finally, we use the BEKK-MGARCHmodel to compare the volatility synergistic effect of currency exchange rate between China andthe United States respectively with the associated fluctuations of the national currency under thepolicy coordination joint intervention. The results show that, there are significant differences onthe causes of fluctuations in currency exchange rates, but the main impacts are the global trendvolatility factor, regional impact factor and idiosyncratic shocks factor. From the time-varyingcorrelation analysis on the exchange rate fluctuations between RMB and the associated currency,we see that the volatility of the correlation coefficient of the currency exchange ratefluctuations of them before2005is greater than after2005.The2008financial crisis haddisturbed the trend, the volatility and fluctuation frequency of the correlation coefficient of thecurrency exchange rate fluctuations of them during the2008-2009financial crisis is significantlyhigher than in normal situations.The joint intervention in monetary policy in general decreasedthe synergies associated with the RMB currency exchange rate fluctuations. The US monetarypolicy shocks as a global impact factor plays a fundamental role in maintaining stability in theexchange rate market, while the impact of China’s monetary policy more as a regional impactfactor of stability in the exchange rate on the Asian market plays a leading role in themaintenance. Chapter6is the combination of the above chapter’s conclusions. Under the consideration ofthe representative value based on reality, we selected a range of economic indicators andconstructed the China Financial Conditions Index by the Time-Varying ParameterFactor-Augmented Vector Autoregressive Model (TVP-FAVAR).Test results confirmed that theindex can not only effectively reflect the health of the currency market, but it has alsodemonstrated a strong ability to predict deserve to be included in the formulation of monetarypolicy reference index system. From the perspective of money market stability, we used theinfinite hidden Markov switch model combined with hierarchical Dirichlet process mixturemodel（MS-IHMM-HDPM）to study the regime effects of Financial Conditions Index. Theempirical results show that the financial conditions index at different stages of macroeconomichad showed obvious smoothness and stability characteristics, and China’s money market on thewhole does not exist the very serious systemic risk. However, the strengths of the different stagesof financial stability in the macroeconomic situation are significantly different. China’s currencymarket faced the weakest stability during the financial crisis. Furthermore, we use DynamicModel Averaging model to study the risk sources that determine the money market stability. TheStudies showed that foreign exchange reserves, money supply, RMB exchange rate and assetprices (such as the real estate prices) increasingly become the main risk sources that influencethe stability of money market. Asset price should be included into the monetary policy reactionfunction as an important variable.Based on the perspective of closed economy and open economy, simulation and evaluationin the time varying sence of advanced macroeconometric model deepen understanding ofmonetary policy operation rules and monetary policy implementation effect under the new macroeconomic environment. It has significance theoretical value and contemporary relevance for themonetary authority to improve the coordination ability of monetary policy, optimize monetarypolicy reaction function and implement counter-cyclical operation in order to offsetting systemicfinancial risk.