The Analysis Of The Efficiency Of Monetary Policy In China: 1998-2009

Monetary policy is the primary means of macroeconomic control by central bank.It plays an important role in stabilizing prices,full employment,promoting economic growth and keeping balance of international payments.Therefore,the effect of monetary policy has always been the focus of the government and academia.It is a short moment to the long river of history from the 1997 Asian financial crisis to the present.However,it has experienced two serious financial crises. This paper is in research for the efficiency of China's monetary policy in the economic cycle between the 1997 Asian financial crisis and the present global financial crisis triggered by the U.S. sub-prime crisis.It dose not only have a great academic value, but also has important practical significance for the practice and guidance of China's monetary policy.This paper is divided into five parts logically. The first part is previous remarks including the background,the significance and the idea of the research.The second part reviews the theory of monetary policy's efficiency and elaborates related literature review.The third part is the description for data and econometric model.The research mainly studies for the impact of money supply on output.So we choose M1,M2and GDP as measures. The first step is to use ADF unit root test to test the stability of data.The second step is based on E-G two-step cointegration test, respectively test two groups of M1,GDP and M2,GDP.The third step is to conduct non-binding estimate of VAR model after proving the long-term stable relationship between the money supply and GDP and determine the impact of money on output based on the analysis of the impulse response function and variance decomposition generated from the VAR system. The fourth part is to analyse the efficiency of monetary policy in this cycle.Taking into account that monetary policy objectives and orientation are not consistent in the cycle, we had better divide the cycle into four stages to discuss the effect of the monetary policy,otherwise it may have a negative impact on the empirical result.The first stage is from 1998 to 2002.For the Southeast Asian financial crisis, the central bank was mainly implementing of appropriate monetary policy to prevent deflation.However, the empirical results show that the effects are not obvious.The second stage is from 2003 to 2006.Because of money and credit growing too fast, excessive growth of investment, serious surplus in international balance of payments led to loose liquidity, the central bank implemented the steady anti-inflationary monetary policy to address these issues.In the stage,GDP maintained good growth momentum, prices were also controlled at a relatively stable level, the empirical results showed that the effects has been enhanced over the previous stage.The third stage is from 2007 to September 2008.The issue of excess liquidity remains unresolved, money and credit expanded fast and price index rose wantonly.Central Committee proposed "double anti" target against economic overheating and anti-inflation.During this period,the prudent fiscal policy and the tight monetary policy were adopted. The empirical results show that the impact is more significant than last stage.The fourth stage is from the September 2008 to now. During this period, the international financial crisis got worse,the external demand declined rapidly and China's economy suffered a downturn trend.So the central bank adopt the appropriate loose monetary policy. From the view of operating objectives, intermediate goals and the ultimate objectives, the effect of monetary policy is quite clear.The fifth part is the conclusions and recommendations. Through analysis of the four stages,the monetary policy is not neutral. Changes in the money supply affect the output and the effect of monetary policy is gradually strengthend.In order to promoting market development, optimizing the transmission mechanism of monetary policy, enhancing the efficiency of monetary policy, China is actively taking much measures and promote various reforms.There are some reasons why the effect of monetary policy gradually strengthen.First, along with the transition of the economy, monetary policy shifted from direct control to indirect regulation.lt reflects the market tendency and will improve the efficiency of monetary policy.Second,China steadily propose the interest-rate market reform that enhances the role of interst rate in monetary policy transmission mechanism. Third, continuous development and improvement of financial market improve allocative efficiency of resources.Fourth, the reform and improvement of exchange rate system improve the flexibility of China's exchange rate.Athough the effect of monetary policy in China is gradually strengthened, factors preventing monetary policy playing a role are still not been eliminated. Therefore put forward the following recommendations:first, we must develop and improve financial markets to establish a more effective macro-control system and sound monetary policy transmission mechanism; second, continue to promote the marketization of interest rates to make the interest rate determined by the market; Third, the empirical results show that the relation between Ml and GDP is more closely, it is proposed to choose M1 as intermediate target of monetary policy; fourth, improve the transparency of monetary policy and reasonably guide the public with rational expectations; fifth, grasp the law of the monetary policy lag and improve the initiative of monetary policy.