Asymmetric Effects Of Monetary Policy

Monetary policy is a principal part of macro-economic policy framework, which caninfluence important macro-economic variables including economic growth and general price level.With the development of non-neutrality of money and monetary policy transmission channelstheories, the asymmetric effect of monetary policy was introduced as a frontier subject inmacro-economic and monetary researches in the1990's. The asymmetric effect of monetarypolicy can be divided into vertical asymmetric effect and horizontal asymmetric effect. Verticalasymmetric effect mainly refers to different effect between expansionary and tight monetarypolicy, and different effect of monetary policy when economic growth or inflation situation isdifferent. Horizontal asymmetric effect includes different effect among industries, regions, orenterprises.Current monetary policy framework was founded in China in the1990's. The goals ofmonetary policy are: keep the value of currency stable, and enhance economic growth. Moneysupply is used as the intermediate target of monetary policy since1996. Monetary policy toolsinclude: open market operation, required reserve ratio, benchmark interest rate, rediscount andrelending, window guidance, etc. As the monetary policy operations continue to develop, keepingup pace of the economic system transition and the requirements of macro-economic situation, theeffects of monetary policy are enhanced gradually. With this background, researches on theasymmetric effect of monetary policy in China can provide instructions for monetary policyoperation and financial reform.The paper uses a two-stage analytical framework to analyze the asymmetric effect betweenexpansionary and tight monetary policy. The empirical analysis based on data since1997showsthe effect of tight monetary policy on economic growth is bigger than that of expansionarymonetary policy. The main causes of this asymmetric effect are sticky price, subjectiveexpectation, and credit channel of monetary policy transmission. First, the phenomenon of stickyprice exists in real economy due to imperfect information and imperfect market. And, sticky pricehas an asymmetric character that downward adjustment is more difficult than upward adjustmentbecause of information searching cost and good-price-for-high-quality effect. Thus, companiestend to have less price reduction but more output reduction when monetary policy is tight, andhave more price reduction and less output reduction when monetary policy is expansionary.Second, economic agents' subjective expectation has an asymmetric character that negative expectation is usually stronger than optimistic expectation, because there are more risk-averseeconomic agents than other kinds in real economy. In a period of recession, stronger negativeexpectation will weaken the effect of expansionary monetary policy by affecting economic agents'decision and behavior, resulting in a smaller effect of expansionary monetary policy comparedwith tight monetary policy. Third, credit transmission channel of monetary policy, including banklending channel and balance-sheet channel, has asymmetric influence on monetary policy effect.In bank lending channel, the amount of bank lending is limited by both reserve requirement andcapital adequacy requirement. In a period of recession, more strict capital adequacy requirementwill weaken the effect of loose reserve requirement, thus make the expansionary monetary policyeffect smaller than expected. In balance-sheet channel, banks' lending decision is influenced byborrowers' assets and cash flow situation. In a period of recession, borrowers' balance sheetsworsen, so that banks are not willing to increase the amount of loan and the expansionarymonetary policy effect is weakened.The analysis on the asymmetric effect of monetary policy among different enterprises mainlyfocuses enterprises of different ownership. The analysis shows that monetary policy has biggershort-term influence on state-owned and state-holding enterprises and joint-equity enterprises, hasbigger accumulating influence on state-owned and state-holding enterprises and enterprises withHong Kong, Macao, Taiwan and foreign funds, and has smallest influence on private enterprises.The asymmetric effect reflects that funding capacity is diversified among enterprises of differentownership. In the condition of credit rationing, private enterprises are under scale discriminationand ownership discrimination, so that they get smaller loans from banks and are less sensitive tomonetary policy. Moreover, the soundness of management especially financial management mayinfluence enterprises funding capacity. State-owned and state-holding enterprises, joint-equityenterprises and enterprises with Hong Kong, Macao, Taiwan and foreign funds are more sensitiveto monetary policy due to sound management.The analysis on the asymmetric effect of monetary policy among industries shows thatsecondary industry has a bigger monetary policy effect, while primary industry and tertiaryindustry have smaller effects. The main reason of this asymmetric effect are:1) primary andtertiary industries have more small agencies than secondary industry, which results in weakersensitivity to monetary policy;2) secondary industry is more dependent on capital while primaryand tertiary industries are more dependent on labor, thus funding condition related to monetarypolicy has stronger influence to secondary industry;3) other policies supporting primary industryweaken the monetary policy effect to it.There is also an asymmetric effect of monetary policy among regions in China. It is concluded that economy of eastern region has positive respond to monetary policy; economy ofcentral region has short-term positive respond but long-term negative respond to monetary policy;economy of western and northeastern regions have negative respond to monetary policy. The mainfactors that cause this asymmetric effect include imbalance of regional economic development,and the unbalanced regional distribution of large enterprises and financial resource.A series of analyses in the paper verify the existence of asymmetric effect of monetary policyin China, and reveal some deep-seated problems lie in the financial system. In consideration of theabove conclusions, the monetary policy operations should have pertinence and diversification tocertain extent, so that the policy effect can be improved and equalized. Financial reform shouldattach more importance to diversification of financial institutions, development of policy-orientedfinancial system for small enterprises and agriculture, so that the problem of scale discrimination,ownership discrimination and unbalanced distribution of financial resource can be solved toimprove monetary policy effect.