Analysis Of Monetary Policy In A Time Of Financial Crisis

Financial crisis which is sweeping over the whole world is a crisis that is caused by junior mortgage loan, resulting in bankruptcy of financial institutes, violent volatility of stock market and decrease in American real economy. The financial crisis stems from American subprime crisis and exerts great impact on the economic and financial environment in United States as well as all over the world. Each country adopts unprecedented loose monetary policies in respond to the crisis, but the global economy still doesn't get rid of depression. In the particular period, the analysis of characteristics and effects of monetary policies took by China and the United States will contribute to examination of the efficiency of Chinese monetary policy in terms of practice; discover any deficiencies in the course of implementing the monetary policy and recognize the challenges that we are facing, which holds important theory and reality significance for improving executive force of Chinese monetary policy in special economic situation.The first part of the thesis reviews the cause(s) of financial crisis and its impact on economy. The financial crisis which is sweeping over the world originates from the subprime crisis in the United States. After American "9·11" event, loose monetary policy was implemented for restoration of economy. Low interest rate policy stimulated the development of the real estate industry, and innovative financial instruments - asset securitization led to global spread of the crisis. The financial crisis has a direct influence on financial institutions of different types in the United States. The amount of closed banks in the United States reaches 38. Those banks which do not fall into bankruptcy are facing the influence from the increase in financing costs and mobility risk aggravation. In addition American real economy is also facing the influence from increasing unemployment and decreasing consumption. In respect of capital markets, the global stock market slumps and business financing on the market has been seriously affected. Under the financial crisis the most direct impact on China is from the external trade. The credit crisis also greatly affected the confidence of investors, consumers, thereby influenced the smooth operation of real economy in our country; in response of financial crisis, monetary policies adopted by each country government increased imported inflation risk confronting China and led to excess liquidity and thus reduced the alternatives of monetary policy.In the second part the relevant theories of monetary policy effects are analyzed. Monetary policy effects should include quantity effect, quality effect and monetary policy validity. Due to the differences in assumption conditions of selected models, the economics world always holds different opinions on the validity of monetary policy. The asymmetry of monetary policy brings itself different effects under different economic environment. In addition, there is a discussion about the determination of monetary policy target, monetary policy instruments, effects of other monetary policies and the final target of monetary policy. The monetary policy with sole target is more effective than that with many which will influence the policy effect due to the conflict among targets. The effects of monetary policy instruments are different and the application of all monetary policy instruments also can generate interaction. On the basis of application of monetary policy instruments, illustrate how monetary policy transmission mechanism realizes the monetary policy target; since this financial crisis is a credit crisis caused by financial derivatives, emphasize on analyzing the effect to monetary policy from financial assets, especially the effect to monetary policy transmission mechanism and monetary policy instruments. Financial assets exert both positive and negative effects on monetary policy transmission mechanism which can improve the unity of monetary policy transmission mechanism, strengthen elasticity and flexibility of the monetary policy, shorten the policy time lag of transmission mechanism and increase policy transmission efficiency; which also can complicate the monetary policy transmission and the change(s) in financing structure perform(s) impact on monetary policy transmission to certain extent. The influence to monetary policy instruments mainly lies in reducing deposit reserve fund rate, rediscount rate, reloan policy force and in strengthening policy effect of open market operation and in clarifying rate policy effect.In the third part a comparison in use of examples is made of monetary policies implemented for dealing with financial crisis and corresponding effects between China and the United States. It is found that the United States implemented a dramatically intensive rate-cut policy in a short term, open market operation policy was adopted most often and a series of new monetary policy instruments were adopted to inject liquidity into financial market. However since it is a credit crisis, rate cut has a little stimulus effect on American real economy and monetary policy has non-sustainability on improving consumption and economy, but consumption's special position in American economy weakens monetary policy effect. In our country the application of monetary policy instruments in respond of crisis management is still single in which rate cut and reduction of deposit reserve fund rate are of more use, which is mainly due to not available of developed and perfect bill market as well as undeveloped open market operation tools. The monetary policy adopted by China has co-movement relationship with the United States. The loose monetary policy implemented in our country benefits for stimulating economy, increasing the investment in real economy, stabilizing financial assets price and avoiding the influence to real economy brought by virtual economy collapse. However our country is still facing the risk of low performance of rate-cut policy and facing how to maintain economic balance both internally and externally.Based on the above analysis, suggestions on how to improve the executive force of monetary policy are brought out in the fourth part. First of all, because in China the monetary policy instruments used in response of the crisis are over single, they should be perfected mainly on the application of rediscount monetary policy and open market operation means as well as relaxing rate management and accelerating rate market-orient reform; second, American long-term loose monetary policy is one of the causes for outbreak of the crisis, so reasonable monetary policy targets should be set up and the entire economic cycle is within the adjust and control scope at the same time of managing crisis and inhibiting depressed economy so as to avoid any crisis in the future. Third, since financial assets exert influence on monetary policy transmission mechanism and as an important signal customer confidence index indicates that the monetary policies adopted for managing crisis are blocked in transmission and consumers' reaction is not positive enough, moreover, how to improve monetary policy transmission is always one of the questions in implementing Chinese monetary policy, so it is necessary to smooth monetary policy transmission mechanism. First, strengthen the validity of Commercial Bank function performed in monetary policy transmission mechanism. Second, improve business sensibility to transmission signal of monetary policy. Third, extend social financing channel, activate social investment, expand monetary policy transmission path. Forth, construct monetary policy transmission channel for meeting consumption requirements, establish and perfect consumption credit system. Finally, emphasize on finance policy and other policies matching monetary policy in order to create good policy environment for monetary policies.