A Study On The Validity Of Monetary Policy Of The Credit Channel Of Transmission In China

Nowadays, monetary policy is becoming the most important method of adjusting economics in many countries. The question whether the monetary policy will be effective depends on whether the monetary policy transmission is expedite. The traditional interest transmission is the main transmission in west developed countries, but if it is effective, there must be some assumptions, such as the market is completely competitive and the information is sufficient. To the contrary, the credit channel of transmission is founded on non-completely competitive market and non-sufficient information. China economy and finance are not developed, so in our country, the credit channel of transmission still is the main channel, and it is meaningful to studying the credit channel of transmission in China.Although some literature have studied the relationship between monetary policy'transmission and its validity, but they mainly talked about which transmission is more important, the money channel of transmission or the credit channel of transmission. The paper tries to study the effect of the credit channel of transmission on the monetary policy's validity by using several methods of econometrics and puts the emphasis on the study of the empirical test of the relationship between the credit channel of transmission and the monetary policy's validity.The structure of the paper is as follows: in the first part of the paper, we introduce meaning and the aim of the paper. In the second part of the paper, we introduce the theories on monetary policy and the channels of transmission, which is the theoretical foundation of the paper. In the third part of the paper, we introduce the models and approaches which we can use to measure and test the correlativity of GDP, CR, M1. In the fourth part of the paper, we test the correlativity of GDP, CR, M1 by using the models and methods mentioned above. In the end, we draw the conclusion and give our economic suggestions.In the chapter 2 of the paper, we systematically introduced the theoretical studies on the monetary policy and its channels of transmission by the economists from western countries. Specially, we give two math models about the credit channel of transmission: a. CC-LM model provided by Bernanke and Blinder (1988), b. an extended model of CC-LM model. We also give the situation of studies both in China and in foreign countries. This chapter is the foundation of the paper.In the chapter 3 of the paper, we introduced some important time series analysis models and methods by which we can measure and test the correlativity of GDP, CR and M1. In the first section of the chapter, we introduced the testing methods by which to differentiate stationary series and unit root test, i.e, ADF testing method and PP testing method. Then, we introduced the co-integration theory and Error Correction Model. The co-integration testing is used to determine the long-run equilibrium relationship between two or more variables. In the section 3, we introduced the VAR model analyzing the dynamic effect in the system. The general VAR(p) model is as follows: y_t = A₁y_t-1+…+A_py_t-p+BX_t+u_t y_t is n dimension of endogenous variables, X_t is d dimension of exogenous variables. A₁,…,A_P and B is coefficient matrix that will be estimated. u t is the dimension of distribution.In the section 4, we introduced the Granger causality testing to determine the casual relationship between the two series. Although the Granger testing causality can not give us the information of which one determines the other, but it also tells us the level of explanation between two variables. In the last section of this chapter, we introduced the impulse response function and the variance decomposition.In the chapter 4, we test the correlativity of GDP, CR and M1 in our country by using the models and methods introduced in the chapter 2. This chapter is the most important part of the paper. At first, we have to use the unit root test to make sure that the time series are stationary time series. By using the ADF testing method and PP testing method, we find that LNGDP, LNCR and LNM1 were all I (1). Then we could use co-integration test to further our study on the relationship between the variables and find there are stable and equilibrium relationship among the three variables in a long-time. After that, we use VAR model to test the relationship among the three variables and find M1 have a stronger effect than CR on output. It means the money channel of transmission have a bigger effect on the credit channel of transmission. Then, we use Granger causality testing method to test the relationship between the level of each tow variables and find that CR and M1 both are the Grange causality of GDP. That means their previews values have the ability to explain the output. It strengthens the conclusion of co-integration testing. At last, we use Impulse response function to test the relationship between two variables.In the last chapter of the paper, we give the results of our studies. At last, we give our economic suggestion.