A Comparative Analysis On The Effectiveness Of The Quantity Tools And The Price Tools Of Monetary Policy In China

The tools of monetary policy are mainly divided into quantity tools and price tools, and the central bank prefers to the quantitative monetary tools in China. The scholars dispute very greatly that which one is more suitable for China between the quantity tool and price tool. Because there are many aspects in differences between the two monetary tools, such as in the transmission mechanism, the effect of influence and the coverage of influence, different tools have different effects on the economic development of our country. This dissertation analyzes the effect of China’s monetary policy tools, in order to better understanding and using of quantity and price tools.The transmission mechanism of monetary tools has very important influence on the effectiveness. There are great differences in intermediary targets, transmission mechanism and mechanism of action. This dissertation mainly judged effectiveness of monetary policy tools from two sides:firstly, the influence of monetary policy tool on the ultimate goal. Monetary policy tools should have good effect on the final goal. If the tools of monetary policy of the central bank have no effect on inflation and output, regulation of the economy is obviously invalid; if the central bank’s regulation even causes severe recession or volatility in inflation or economy, it is disastrous to use the tools of monetary policy. Secondly, the impact of conduction process of monetary tools is conducive to economic and social development. If the impact of conduction process is detrimental to social justice, it is to be alert on the use of monetary tools. Through the analysis on realistic choice of monetary tools in our country in different stages after1996, the central bank has a clear preference to quantitative monetary tools such as deposit reserve rate. Which is more suitable for China is a controversial issue in academic circles. This dissertation explores the validity of the tools by empirical and theoretical analysis.This dissertation makes analysis on the effectiveness of the two tools of monetary policy by the McCallum model and the Taylor rule model. In order to be more in line with China’s actual situation, two lags are introduced into the McCallum rule to empirical test whether the quantity tools can achieve the ultimate goal of central bank. Results show that, there are significantly regulatory role in controlling inflation and hedging foreign exchange by controlling the quantity of money. But the central bank should be forward-looking, so as to prevent man-made waves. It is good for quantity tools to hedge foreign exchange, so quantity tools will continue to play a hedge role in the future. The results also show that it is not significant to control output; it also means relatively small impact on the real economy by using quantity tools to adjust the economy.Regression analysis was performed by using the extended Taylor rule and the look-forward Taylor rule to analyze regulation of the price instruments. The results show that there are no significant changes in the interest rate on the output gap, namely the interest rate change is not sensitive to the output gap; interest rate changes significantly in response to inflation gap, which mean that interest rates are highly sensitive to inflation, but the coefficient is less than1, which may cause more inflation because the change of nominal interest rate regulation is far lower than the inflation gap; there is no use for price tool to deal with the passive change of the base currency resulted by the exchange fluctuations. Therefore, changes in interest rates can not control the output, even aggravate inflation. So Taylor rule is not applicable to China at present, the effectiveness of price tools in China is very low.The empirical analysis are helpful for us to judge the impact of two kinds of tools to the macro economy, but the process, mechanism and effect still need further theoretical analysis. There are many factors that affect the effectiveness of the monetary policy tools, but the effect of transmission mechanism of monetary tools validity is the most important. Through the analysis the dissertation finds that quantity tools are more suitable for the actual situation of China’s excess liquidity in tackling inflation, quantity tools in the side of the impact on the real economy are also consistent with our attention to the goal of economic development. Because the market is not perfect, and there are low interest rate and high rate of return in industries in China, it is highly uncertain for price tools to regulate inflation or output. If the central bank sharply increases interest rates, it will have a direct impact on the real economy. So at present, the quantity tools are more suitable for our country.Basing on empirical analysis and theoretical analysis, the results shows the same results. Quantity tools are more suitable for China at present, but the tool selection is a dynamic process. China’s preference for quantity tools has many problems. The quantity tools can not cure the symptoms, and can not effectively allocate funds. With the improvement of the financial markets and financial innovation, controlling of the amount of money will be increasingly difficult. Another serious problem is lower interest rates in the long term which will lead to a series of economic, social problems:low interest rates lead to excessive stimulation of investment, which attract capital pouring into the non-entity industry, and cause inflation. The low interest rate is not conducive to the upgrading of the industrial structure. Low-income people often prefer to savings, and the rich prefer to borrow money. Low-income people get very low interest, but the rich enjoy the benefits of cheap money which is not conducive to narrowing the gap between rich and poor.In view of the above problems, this dissertation considers that the central bank should seize the opportunity to gradually raise interest rates and change the condition of low interest, so that the interest rate can exert a regulatory effect on the economy; the central bank should promote the perfection of financial and commodity markets, so as to provide a favorable market environment for the interest rate transmission; because the allocation discrimination of the commercial bank on small and medium-sized enterprises, the state should help small and medium-sized enterprises to encourage the development of SMEs; the state should make reform on the exchange rate system, on the one side to close an important the "tap" for excess liquidity, on the other side, the exchange rate can play the role of price tools; China should revert the development goal towards development of quality and promote the upgrading of the industrial structure, so that price tools can play a better role.