The Choices Of Monetary Policy Under The Framework Of International Coordination

Globalization and integration is one of the main features of the world economy today. With the growth of foreign trade in the total output of global economy and international capital flows, economic growth in open economies is increasingly dependent on global economic situation. Globalization has such a strong effect on the financial environment in which the monetary policy can be operated successfully that central banks have to be faced with severe challenges. Since monetary policy has been more and more affected by globalization, central banks as a country’s monetary policy-makers should re-examine the regulatory frameworks of monetary policy from the angle of globalization, which includes not only the rise from management of domestic demand to the global demand-based, but also the rise from domestic policy design to global.As the control of monetary policy has become more complex, more extensive and more difficult under the demand management of globalization, the central bank will have to squarely face the problem of international coordination of monetary policy. On the one hand the domestic policy must take into account the impact of economic liberalization, monetary policy making is not only to maintain the internal balance of the economy, but also to ensure that the economy is balanced. Different monetary policy tools vary in the efficiency of achieving internal and external equilibrium, and a different policy mix will produce different effects. On the other hand, the international coordination of policies has become increasingly important. Under the conditions of a closed economy, a country’s monetary policy will not have spillover effects, while very few domestic monetary policies will be influenced by those implemented abroad, for the factors such as capital, goods, and labor could not flow freely. But in fact, totally enclosed economy is non-existent in history, economic and financial globalization has greatly strengthened the links of macroeconomies between different countries. There is significant interaction among various monetary policies, which need to be accommodated in making monetary policy decisions in an opening country.Firstly this paper defines the scope of the study, and then puts its finger on the concept of international coordination of monetary policy as well as the connections and differences between related concepts. Besides the prerequisite for the international coordination of monetary policy, the analysis next contains the objectives, contents, modes, forms, and principles of it. In order to make the right decisions, the international coordination of monetary policy is also interpreted from the point of view of cost-benefit. This article summarizes systematically both the current research status and the development trend of the theory of international coordination of monetary policy. Following the Interdependence Theory of Mead, the MFD model, NOEM model, Hamada model and two country-game model are introduced in order. Moreover, the program theory of international coordination of monetary policy and the theory of counterproductive cooperation of monetary policy are also analyzed and evaluated in the text.With the help of theoretical and empirical methods, this paper studies whether the impact from abroad will exert some influence over China’s economy, as well as what kind of influence, trend and delivery mechanism. The main conclusions are as follows:(1) The U.S. monetary policy has some spillover effect on China’s output, which is primarily a short-term impact and concentrate in the first 3 months. It fluctuates around the 0 from the 3st month to 8th and nearly disappears after 8months later. Considering the direction of the Influence, the U.S. monetary policy negatively affects the production of China most of time, which means restrictive monetary policy will bring short-term productivity growth in China, while expansionary monetary policy will bring short-term reduction.(2) The U.S. monetary policy has some spillover effect on the level of inflation in China. There will be a domestic rise in inflation when America begins to implement their restrictive monetary policy, which reaches its peak in the first 3 months and then declines month after month. However, this positive effect will last for a long time.(3) Spillover effect is transmitted by the impact of U.S. monetary policy through policy. The U.S. monetary policy has a positive influence over the interest rate in China, whose pulse value peaks in the 4th month and remains stable after 10 months later. Spillover effect from U.S. monetary policy is positive, that is to say China would accordingly raise the interest rate once America hike happened. The impact of U.S. monetary policy on China’s money supply can be also positive. The pulse value peaks in the 7th month, which means that When the U.S. monetary policy is restrictive, the money supply in our country is rising instead. Interest rate policy changes in the same direction, while the money supply is on the contrary. The test results of China’s monetary policy autonomy showed that, although money supply is regarded as the intermediate target of monetary policy strategy, the control over it is not very strong. The negative correlation between the fluctuation ratio of net domestic assets changes of central bank and that of net assets changes overseas has improved greatly, and our central bank’s monetary policy can be viewed as a passive adjustment for the U.S. monetary policy to a great extent.(4) Spillover effect is transmitted by the impact of U.S. monetary policy through trade. The U.S. monetary policy has a positive impact on China’s imports, which lasts for 16 months. During these months the fluctuations are more intense despite of a downward tendency of pulse value. Spurred by the expansionary monetary policy in the United States, China’s imports will be reduced, and vice verse. In the 4th month the effects from U.S. monetary policy reaches its peak value, which remains 20 months, and then shows a fluctuant decline. The effects on China’s net imports are first negative for about 3 months and then become positive. The adjustments in the U.S. monetary policy will definitely affect China’s net imports, for example, our net imports will be reduced by their restrictive monetary policy within 3 months, while the net imports will increase after 3 months later.(5) Spillover effect is transmitted by the impact of U.S. monetary policy through asset price. The U.S. monetary policy will have a negative impact on asset price in China, which means the restrictive monetary policy of America may result in the decrease of asset price return in China and vice verse. This kind of effect remains about 20 months, and the peak value turns up in the 3st month.(6) Among the 3 above channels, the impact on policy may be the greatest, with asset price next and trade last. As far as trade is concerned, the impact of U.S. monetary policy on imports is greater than exports and net imports.This paper consists of 7 chapters, with the structure as following:Chapter 1,Introduction. The research background and practical significance are presented first in this part, then the key issues are put forward and content arrangement of this paper are also described, finally the major innovations and inadequacies are listed.Chapter 2,The basic framework of international coordination of monetary policy and its major contents. Chapter 3,Theory and Literature Review. This paper makes a thorough review of research on the correlative theory of international coordination of monetary policy, including the Interdependence theory, MFD model, NOEM model, achievements of Game theory, the program theory of international coordination of monetary policy and the theory of counterproductive cooperation of monetary policy.Chapter 4,Theoretical analysis of the necessity of international coordination of monetary policy in China. In this chapter, the necessity of international coordination of monetary policy is interpreted from a theoretical perspective. First, the degree of economic opening is evaluated based on the the Interdependence theory in China; Second, the necessity of international coordination of monetary policy is proved using the extended MFD model; Third, The actual demand of international coordination of monetary policy is analyzed according to the extended model of impossible triangle.Chapter 5,The empirical study of the necessity of international coordination of monetary policy in China. SVAR is the major method in this chapter, using which the necessity of international coordination of monetary policy in China based on tests of spillover effect from U.S. monetary policy is illustrated. Otherwise, this chapter tests the channel of spilling and makes comparative analysis based on variance after the test of existence of spillover effect.Chapter 6,Modes of International coordination of monetary policy and practices of international coordination in China. With diverse International monetary systems, this part generalizes the modes of International coordination of monetary policy during different periods and the practices of international coordination of monetary policy in China.Chapter 7,Policy advices. As the last chapter, this part gives some policy advices on the choices of monetary policy in China under the framework of International coordination of monetary policy. It mainly focuses on strengthening the coordination between exchange rate policy and interest rate policy, enhancing International coordination of monetary policy between China and America, improving the national environment of International coordination of monetary policy, promoting the coordinative capability of China, attaching much importance on relations between International coordination of monetary policy and economic sovereignty, and finally rethinking the International coordination of monetary policy while expansionary monetary policy quits. The innovations of this article exist in:(1) While establishing SVAR system, the simultaneous implementation of internal and external equilibrium is fully taken into account, and the variables reflecting the balance of international payments situation.(2) The impact of U.S. monetary policy on prices in China is also studied. International transmission mechanism of inflation and International coordination of monetary policy are combined in empirical results.(3) The international transmission mechanism of monetary policy is divided into 3 channels which are compared after each effect test using variance decomposition.(4) With theory and empirical analyze, this part integrate present coordinative context with monetary coordination in narrow sense and US-China monetary coordination closely.The shortages of this paper display in the following aspect:(1) the discussion of international monetary cooperation in this paper doesn’t involve in politics, legislation and other fields. (2) This paper does not take other central banks into account. (3) This paper uses FFR as a proxy for U.S. monetary policy, but considering the background of extremely expansionary monetary policy, FFR maybe can’t catch the characteristic of US monetary policy.