Research On The Transmission Mechanism Of Monetary Policy Under Multiple Constraint

The 2008 international financial crisis had a major impact on China’s economy.In response to the downward pressure on the economy,China’s central government adopted an active "four trillion" fiscal stimulus plan from 2009 to 2010.Although the large-scale fiscal stimulus plan avoided a hard landing for China’s economy,it caused a surge in the supply of money and bank loans,which led to a sharp rise in domestic prices and a significant inflationary effect.In order to reduce credit supply and inflation,the People’s Bank of China(PBC)and other financial regulators began to tighten monetary policy at the end of 2010,implementing tightening monetary and credit policies and strictly supervising commercial bank loans.Under the background of the tightening of macroeconomic regulation and control in 2010,China’s shadow banking system has rapidly expanded.According to the division of shadow banking entities,China’s shadow banking can be subdivided into two categories:one is that nonfinancial enterprises with financing advantages obtain cheap funds from banks,and then re-lending to financial constraint enterprises through entrusted loans or direct lending in order to earn interest spreads.This type of shadow banking is called traditional“shadow banking".The other is commercial banks to avoid strict loan constraints and financial regulation,lend funds to enterprises through unregulated shadow banking,which is called "the shadow of banks".The former stems from the misallocation of credit resources and interest rate market regulation formed by China’s incomplete financial system,while the latter is the regulatory arbitrage behavior of commercial banks in the context of macro-control tightening.Although the two types of shadow banks are engaged in different subjects,their essence is regulatory arbitrage,which has an important impact on the transmission of monetary policy,and unsupervised shadow banks can easily increase the vulnerability of the financial system and accumulate potential financial risk.In addition to the rapid expansion of the shadow banking system,another area that has attracted attention is China’s real estate market.Since the "tax-sharing system reform" in 1994 weakened the Chinese local government’s source of fiscal revenue,under the promotion tournament model,Chinese local officials have strong incentives to increase land prices by vigorously developing the real estate market and obtain high land transfer funds for infrastructure construction to stimulate local GDP growth.During the "four trillion" fiscal stimulus plan,land transfer proceeds became the most important source of fiscal revenue for local governments.Moreover,real estate is a pillar industry of the national economy,and there are many industries closely related to it.If there is an economic downturn,the local government will loosen the control of the real estate industry and even introduce rescue measures to "maintain growth".After the international financial crisis in 2008,housing prices rose in turn,which led to the accumulation of credit funds in the real estate industry.The soaring enthusiasm for real estate investment drove the continuous rise of housing prices in China.During the "four trillion" fiscal stimulus plan,although the financing constraints of local governments and state-owned enterprises were relaxed,private enterprises dominated by small and medium-sized enterprises(SMEs)were still subject to strong financing constraints and faced the problems of "financing difficulties" and "financing expensive".Especially in 2010 under the background of tightening of macroeconomic control,the financing capacity of China’s SMEs was further weakened.What’s more,the sudden impact of COVID-19 has caused the financing problems of SMEs in China to become more prominent.In order to guide the allocation of resources to the weak links of the national economy,the PBC has created a structural monetary policy with the main tools of targeted requirement reserve ratio(RRR)cuts and refinancing since 2014.The goal is to solve the financing problems of SMEs and promote the development of the real economy.However,the current academic circles have not reached a consensus on the effect of China’s structural monetary policy.After the 2008 international financial crisis,a new phenomenon about the transmission of monetary policy emerged.The developed economies such as Europe,America and Japan used a large number of unconventional monetary policies to stimulate the economy.This is in sharp contrast with China’s large-scale fiscal stimulus plan.In the practice of unconventional monetary policy,the negative interest rate policy(NIRP)is a focus of attention on current global central bank policy issues.Compared with quantitative easing and forward-looking guidance,the effectiveness of the NIRP is still unclear.In-depth exploration of the transmission mechanism and effects of the NIRP has important policy implications for PBC to improve the modern monetary policy regulation.In this context,this paper selected after the international financial crisis in 2008 China’s macroeconomic characteristics of some facts such as the expansion of shadow banking,rising housing prices,and the intensification of financing difficulties for SMEs,discusses the impact of these phenomena on the transmission of monetary policy.It is very important for China in the new situation to grasp the direction and intensity of monetary policy regulation.In addition,the NIRP implemented by some developed economies in the world such as Europe and Japan provide a valuable research material for China to further improve monetary policy regulation.Through forward-looking analysis of the transmission mechanism and effects of NIRP,we can take precautions to deal with possible future emergencies the zero lower bound of the nominal interest rate in China.Based on this,this paper uses the New Keynesian Dynamic Stochastic General Equilibrium(NK-DSGE)model framework,the most important paradigm of monetary policy transmission in macroeconomics,to analyze the transmission mechanism and effect of China’s monetary policy under multiple constraints.This paper is divided into seven chapters,the first chapter is the introduction.The introduction mainly introduces the research background,research content,research methods and research value.Chapters 2 to 6 specifically analyze the transmission mechanism of monetary policy under different constraints.The research conclusions and policy implications of each chapter are as follows.Chapter 2 studies the transmission of monetary policy under the constraints of shadow banking.This chapter constructs a NK-DSGE model that includes both commercial banks and shadow banking.By introducing different directional capital regulatory policies and effectively dealing with the occasional binding constraint of capital adequacy ratio,we have expanded the newly emerged DSGE Model that studies shadow banking supervision in China.The study found that the impact of tightening monetary policy and the impact of increased capital supervision drive the countercyclical expansion of shadow banking.This shows that the model captures the reality of China’s shadow banking rapid expansion in the context of the sharp tightening of macro-control in 2010,and reflects China’s shadow banking regulatory arbitrage characteristics.On this basis,we further explore the effects of macroprudential policy to supervise shadow banks and promote the transmission effect of monetary policy.The results show that under the impact of tightening monetary policy,the countercyclical macroprudential policy proposed in the literature that incorporates both traditional commercial bank credit and shadow banking credit into capital supervision is not effective.Only when commercial banks and shadow banks are simultaneously implemented capital supervision can be effectively to restrict the regulatory arbitrage of commercial banks,and curb the disorderly expansion of shadow banks,and improve the effectiveness of monetary policy transmission.The study provides important policy implications for Chinese government to formulate policies to supervise shadow banking.Chapter 3 studies the transmission of monetary policy under the constraints of shadow banking activities of non-financial enterprises.By constructing a NK-DSGE model that includes shadow banking activities of non-financial companies,we study the impact of shadow banking on monetary policy regulation,the effects of financial supervision,and evaluate the effect of macroprudential policy.We found that shadow banking activities of non-financial enterprises has a leakage effect on monetary policy regulation;although the government’s financial supervision has reduced the size of shadow banking activities of non-financial enterprises,it has pushed up interest rate on shadow bank loans.Countercyclical macroprudential policy has not only improved the effect of financial supervision by smoothing asset price changes,reduced the economic fluctuation caused by shadow banking activities of non-financial enterprises,but also improved social welfare.The study provides policy implications for supervising shadow banking activities of non-financial enterprises and improving the macroprudential supervision framework.Chapter 4 studies the transmission of monetary policy under the constraints of real estate market fluctuations.We embed housing mortgage loans and real estate producer mortgage loans into a NK-DSGE model with financial intermediaries to examine the impact of real estate fluctuations on the macroeconomics.We found that housing demand shocks drive up housing prices,which in turn increases bank leverage,expands credit,and accumulates financial risks.Once the risks emerge,financial shock will worsen the bank’s balance sheet,tighten credit constraints,causing macroeconomic fluctuations.In order to deal with the impact of real estate fluctuations on the macroeconomics,two housing financial supervision tools,loan-to-value(LTV)and capital adequacy ratio,were selected to conduct countercyclical macroprudential policy experiments.The results showed that the optimal LTV and the optimal capital adequacy ratio should actively response to house prices,but there are differences in the response to credit.Macroprudential policies have trade-offs for different family welfare,and social welfare through Kaldor-Hicks efficiency to improve.Based on the extended policy frontier curve analysis,macroprudential policy reduced the impact of real estate fluctuations on the macro economy by decreasing credit market fluctuations,and coordinate monetary policy to enhance economic and financial stability.This study provides policy implications for clarifying the impact of real estate fluctuations on the macroeconomics,as well as the effectiveness of macroprudential policy to regulate real estate and coordinate monetary policy to maintain economic and financial stability.Chapter 5 studies the transmission of monetary policy under the constraints of SMEs’ financing problems.This study builds a NK-DSGE model which includes heterogeneous enterprise,and incorporates aggregate monetary policy and structural monetary policy into a unified policy analysis framework.We have shown that although expansionary aggregate monetary policies such as interest rate cuts and RRR cuts can significantly stimulate economic growth,interest rate cuts have led to a substantial increase in inflation,and most of the funds released by RRR cuts have flowed into large enterprises.Compared with the“overwhelming flooding" of the aggregate monetary policy,the structural monetary policy,with the example of targeted RRR cuts and refinancing,can accurately guide the orderly flow of funds to SMEs,and ease the financing difficulties of SMEs.Further,“aggregate monetary policy+structural monetary policy" as the central bank’s desired monetary policy regulation paradigm,while can enhance macroeconomic stability and improve social welfare.Through short-term monetary policy coordination and complementing the resource allocation shortcomings,and through long-term deepening reforms to establish a market-oriented financial system,we believe it can fundamentally solve the financing problems of SMEs in China and achieve high-quality economic development.Chapter 6 studies the transmission of monetary policy under the constraints of negative interest rate.This study studies the transmission mechanism and effect of NIRP by building the banking sector with endogenous leverage constraints on the standard financial accelerator model.The impulse responses of risk shock and financial shock shows that the nominal interest rate hits the zero lower bound,which makes the conventional monetary policy invalid and aggravates economic fluctuations.From the long-term and short-term perspective of policy evaluation to analyze NIRP transmission,we find NIRP using reserve interest rate as a policy tool will weak the interest rate and credit transmission mechanism of monetary policy,resulting in no expansionary effect to economic.It’s important to break through the zero bound of deposit interest rate for NIRP.Further research shows that the positive fiscal policy under NIRP is efficient,and increase the space for monetary policy.This study provides implications to understand NIRP transmission,and also provides guidance for building the framework of modern monetary policy,so as to deal with the zero lower bound on nominal interest rate that may appear in the future of China.Chapter 7 summarizes conclusions and gives future research directions.Based on the conclusions of the our research,we think after the 2008 international financial crisis,an important change in the transmission of monetary policy is the need to coordinate with macroprudential policy,especially on issues such as the supervision of shadow banking and the regulation of real estate market,monetary policy and macroprudential policy closely related and cross-cutting,macroprudential policy enhances financial stability through counter-cyclical control,and has a strong optimizing effect on the transmission of monetary policy.Improving the two-pillar control framework of monetary policy and macroprudential policy can better enhance China’s economic and financial stability.Improving the efficiency of resource allocation is also an important consideration in judging the effectiveness of monetary policy transmission.Although structural monetary policy can accurately direct funds to SMEs,monetary policy will eventually be oriented towards aggregate indicators in the long run.The key to solving the financing problems of SMEs lies in deepening reforms,establishing a marketoriented financial system,and allowing the market plays a determining role in resource allocation.After the financial crisis,a new phenomenon in the transmission of monetary policy is that the nominal interest rate hits the zero lower bound,which leads to the failure of conventional monetary policy.For this reason,the central banks of the Eurozone and Japan have to break through the zero lower bond to implement NIRP,but the prerequisite for the expansion effect of NIRP on the economy is to break through the zero lower bound of deposit interest rates.Since breaking the zero lower bound of deposit interest rates will encounter great resistance in moral and legal aspects,avoiding policy interest rates from hitting the zero lower bound and maintaining space for conventional monetary policy regulation is the optimal choice for China’s current and future monetary policy regulation.Finally,we put forward three possible directions for future research on the transmission mechanism of monetary policy.