Study On The Transmission Mechanism Of China's Monetary Policy With DSGE Models

It's well known that the transmission of monetary policy decides its real effects on macroeconomy. Although the transmission of monetary policy has been extensively discussed by theorectical and empirical studies, and a few of common conclusions have been gotten, the related theories of monetary policy's transmission need to be furtherly examined and investigated. The existing literatures mainly employ econometric instruments, such as cointegration, Granger causality test and vector autoregression model (VAR) etc. to study the transmission of monetary policy, and their main objectives are to test the existence of monetary policy's transmission channels, not to analyze how monetary policy infunences real economy through the specific channel. Moreover, the consensus of monetary policy's transmission mechanism is obtained under the circumstances of western countries' perfect market economy; however China is on the developing stage of socialist market economy, so the different economic envirnments make it not necessary that the existing conclusions of monetary policy's transmission can be directly used to instruct China's monetary policy. With these backgrounds, applying Dynamic Stochastic General Equilibrium Model (DSGE) to study China's monetary policy transmission not only has the significance of examining theories of western monetary policy's transmission, and investigating the specific channels of China's monetary policy's transmission has extraordinary practical significance to China's monetary policy implementation.This dissertation analyzes the specific channels of China's monetary policy's transmission and investigates the relative role of GDP's components such as consumption and investment in the monetary policy's transmission by constructing a New Keynesian Dynamic Stochastic General Equilibrium Model (DSGE), and employing Bayesian and Maximum Liklihood methods to estimate linear DSGE's structural parameters, also adopting impulse responses. Based on empirical study, this dissertation draws some meaningful conclusions:First, the smoothed estimation of exogenous stochastic shocks and the comparison between actual and fitted values based on conterfactual simulation of observed variables show that, this dissertation's DSGE models successively depict China's economy and dynamicly characterize China's monetary policy's specific transmission channels with impulse response figures, so these DSGE models are suitable for analyzing China's monetary policy's transmission.Second, impulse reponse analysis shows that, consumption and investment play different role in China's monetary policy's transmission. Investment playes the main role in the transimission of monetary policy, including money supply shock, interest rate shock and credit shock, however, the role of consumption in the transmission is much little.Third, there are always many shocks in the real economy, so in order to make the DSGE model fit China's economy well, this dissertation's DSGE models not only include monetary policy shocks, but also include other exogenous shocks, such as consumption preference shock, investiment adjustment cost shock, price markup shock, wage markup shock, technology shock and money demand shock ect. The result is that except for consumption dominates the transimission of consumption preference shock; investment also plays the main role in the transimission of the other five shocks.Fouth, as the intermediate target of monetary policy, money supply suffered much criticism, so chapter four of this dissertation investigates the feasibility of interest rate as the intermediate target of China's monetary policy with a modified Taylor Rule. The results show that exogenous stochastic shocks influence consumption and investment then output through interest rate, and the estimates of Taylor Rule's parameters are significant, then a conclusion that interest rate as the intermediate target of China's monetary policy is to an extent feasible can be come.This dissertation's dedications and innovations are as follow: Fist, this dissertation employs DSGE models to study China's monetary policy's specific transmission channels, not to test the existence of these transmission channels, which makes up for the defects of existing literatures.Second, this dissertation investigates the applicability of DSGE model for the analysis of China's economy, especially for the analysis of China's monetary policy transimission.Third, the conclusion has rich policy implications. The empirical results show that investment plays a much bigger role than that of consumption in the transimission of monetary policy, which means we must expand consumption in order to improve the transimission of China's monetary policy.