A Study Of The Transmission And Effectiveness Of China’s Monetary Policy In The Open Economy

Monetary policy transmission is a process of monetary policy performing and taking effects. It is also a process of through which currency and capital can circulate, which is decisively meaningful in the achievement of monetary policy objects. With the increasing of China’s opening degree, through financial system, capital flow impacts the effectiveness of monetary policy. In the complicated home and abroad economic situation, it is theoretically and practically meaningful to improve the transmission and effectiveness of monetary policy. Therefore, based on the theory of international economics and monetary finance, this paper thoroughly inquires into the transmission and effectiveness of China’s monetary policy in the open economy from the perspective of financial structure, this paper tries to provide a framework, which providing an empirical study on relevant point of views, and puts forward policy recommendations.On the basis of reviewing domestic and foreign literatures and defining relevant concepts, this paper analyzes the effectiveness of monetary policy considering a variety of circumstances using IS-LM-BP model in open economy, and sorts out the theories of financial structure affecting the transmission and effectiveness of monetary policy. This paper modifies the Macro-Economic Model of Karras (1999) and solves the impact of economic openness and financial structure changes on the effectiveness of monetary policy using mathematical methods, then this paper does qualitative analysis and argumentation using the mechanism of monetary circulation flow and monetary credit creation. Under the framework of this theory, an empirical and applied research combined with China’s reality is carried out in this paper, the main body and conclusions of the paper consists of three parts.First of all, there are two kinds of financial system:bank-based and market-based, bank is an example of indirect financial system, and stock market is an example of direct financial system, this paper empirically tests the transmission of China’s monetary policy in the open economy. In chapter 3, this paper analysis and tests monetary policy risk-taking channel of commercial banks from two aspects:on the one hand, the paper uses time series data of whole banking system to conduct empirical research, and finds that monetary policy risk-taking both in the bank asset side and liability side. On the other hand, the paper also uses panel data of individual banks and uses systematic GMM method to verify the relationship between bank risk-taking and price-based monetary policy and quantitative-based monetary policy. In chapter 4, the paper analysis and tests monetary policy transmission of stock market under the condition of international capital flows. I analyze Chinese Capital Market and its impact on monetary policy and the process of monetary policy transmission, then empirical analysis shows that short term international capital flows have a significant impact on the stock market, the effect of stock market scale and price change on investment and consumption is small (even not significant), the effect of monetary policy on the stock market is ambiguous.Secondly, this paper uses econometric method to analyze influence of Chinese financial structure and economic openness on the effectiveness of monetary policy. In chapter 3, first, the evolution of China’s financial structure and the change of its opening degree are statistically analyzed. Second, the paper provides an empirical study, and the results show that the increase of the degree of economic openness will weaken the output effect and price effect of monetary policy. Further, the paper puts the financial structure explanatory variable in the model, and the empirical results show that the interaction between economic openness and financial structure has strong explanatory power. Last, this paper analyzes the reasons for the effectiveness of China’s monetary policy. In the exchange rate regime, capital flows and the effectiveness of monetary policy, China’s monetary policy independence space is compressed, the improvement of economic openness will promote the transformation of financial structure, financial market development speed is faster than the banking system, and capital inflows and outflows have been exacerbated by the mechanism of monetary circulation. Under the joint action of excessive risk of commercial banks and the transmission of the stock market, the effectiveness of monetary policy will inevitably be weakened, and this conclusion is also reflected in the monetary credit creation level.Finally, the paper gives some policy recommendations about financial reform and monetary policy combining with China’s practice, this is the end of the fifth chapter and the sixth chapter. Feasible combination of policy should be:higher degree of monetary policy independence, managed floating exchange rate regime and loose capital controls. Monetary policy framework needs to be adjusted to the following aspects:the ultimate goal should be joining financial security and forming system of "five objective function" and "weight dynamic adjustment"; turning the media aim from quantity index to price index; developing more structural tools, speeding up the construction of interest rate corridor, and building policy interest rate system. Interest rate and exchange rate market reform and capital account opening should be simultaneously moved forward in step and bring out the best in each other. Financial reform should return to the essence of service economy, it is necessary to improve the multi-level capital market, increase the proportion of direct financing steadily, build a robust, efficient, flexible and inclusive banking system, and to promote the transformation of the financial structure from bank-oriented financial system to market-oriented financial system.