The Research Of China's Monetary Policy Transmission Mechanism

The monetary policy transmission mechanism refers to the process that the central bank use monetary policy tools to affect a series of economic variables and agents to realize final monetary policy goals. The process begins with the monetary policy tool and ends in the policy goal. Due to its complexity, it is always the focus of national monetary authority and also the hot spot in the academic circle.Theoretically, along with the quickening process of Chinese monetization, the establishment and expansion of Chinese monetary and capital market have provided necessary material foundations for the effective transmission. With the strengthening trend of interest rate marketization, a real and effective price signal has come into being gradually, which is good to the linkage of prices in the financial market. Plenty of financial derivatives have also provided many kinds of implementation methods for money policy. All things mentioned here will greatly strengthen the monetary policy's transmission space and elasticity. But they may also increase the difficulty of analyzing and controlling chains of monetary policy transmission.From the aspect of reality, the Chinese People Banking Law promulgated in 1995 stipulates explicitly that the People's Bank of China is the Central Bank, which has the legal responsibility of implementing monetary policy to carry on the macroeconomic adjustment in order to maintain the currency stability and promote economic growth. Whether that goal is realized or not depends on the smooth monetary policy transmission. That is to say, it depends on whether the central bank can affect the consumption, investment, import and export in the demand side, and the output in the supply side, so as to realize the goal of economic balance. However, according to the practice of monetary policy operation, the transmission is not smooth.Therefore, either in the theory or in the reality, it's important to explore the transmission mechanism of China's current monetary policy. This paper adopts methods of uniting theoretical and empirical analysis, historical and logical analysis, transversal and vertical analysis in order to study the transmission mechanism of China's monetary policy from all aspects. The paper begins with the monetary non-neutrality, which is the premise of theoretical study of the transmission mechanism of monetary policy. The paper tests whether that premise is tenable in China, so as to establish the theoretical and practical base. Based on Mishkin (1995), the paper sums up the transmission channels according to policy variables. Namely they are the Interest Channel, the Credit Channel, the Assets Price Channel and the Exchange Rate Channel. The paper follows the rule of beginning with theoretical exploration, then empirical tests and ending in policy advices. It is concluded that:1) Real interest rates and money supply, fixed asset investment and consumption exist long cointegration relationship. The transmission from monetary aggregates to interest rate is tenable, while the transmission from interest rate to real economy is not, which presents that interest rate in our government-led investment is not the core factors.2) Transmission of Monetary Policy in the credit channel is more unimpeded. Central bank monetary policy can control the scale changes of financial institutions. However, Granger causality test finds that the causality relationship between money supply and financial institutions' loan is not obvious, which may imply that the money supply in China is endogenous. 3) China's stock market and money supply exist long-run stability cointegration relationship. Money supply shows obvious affection on the Shanghai stock market capitalization index. The stock market can do a positive response to a standard deviation of the impact of new information. The average delay to reach the peak response is about 7 months. However, the industrial added value, fixed asset investment, and the consumption do not exist long-run stability relationship, and Tobin's Q theory and Modigliani's consumer wealth effect in China is not yet established.4) Monetary policy and exchange rate exist long-run cointegration, but the correlation is very low and cointegration causality is upside down. RMB exchange rate's response to the impact of monetary policy has an average of 7-11 months delay.Finally, according to the realities of China, this paper put forward some suggestions of bettering and perfecting the transmission mechanism and improving the transmissions efficiency of monetary policy.