Monetary Policy In China Price And Quantitative Tools Effectiveness Of Inspection

This paper analysis the differences between quantitative monetary policy and price-based monetary policy, outlines the various theories on the monetary policy transmission mechanism and monetary policy rules from different theoretical perspectives. Base on that, the one-year base rate and deposit reserve ratio are choosed to represent the price-based monetary policy and quantitative monetary policy respectively, considering data availability and effective, as well as the practical feasibility. In this study, VAR model, along with Impulse response and Choleshy Innovation technique, was set up to test the efficiency of positive analysis, based on the quarterly economic data from 1996 to 2010. In general, this paper studies monetary policy in China from both theoritical and empirical side, and meanwhile, to makes some suggestions on monetary policy.The study goes to several conclusions here:First of all, the objective of monetary policy, such as output and price level, and the intermediate variables, like asset investment, money supply and credit volume do affect by monetary policy remarkably. Secondly, Base Rate has stronger influence to most variables, in contrast, deposit reserve ratio always has weak influence but less lag period. Thirdly, the increasing of deposit reserve ratio is hardly any effect to supprese the investment in fixed assets, because of defects in financial markets in China. It shows that the credit channel of monetary transmission mechanism may exist indeed. The decline in the credit scale, causing by deposit reserve ratio increasing, is most likely to be the decline the entity for SMEs rather than investment in fixed assets investment.Thus, in the use of monetary policy on the regulation of the economy, we should be careful with the base rate fist, given full attention to the existence of the lag period; followed by the fine-tuning economy is more suitable for quantitative monetary policy, such as the deposit reserve ratio; third, regulation by the overheating fixed asset investment should pay more attention to price-base monetary instruments; guarding against the possibility hurt to the investments on SMEs; fourth, based on the analysis of asset price channel, the use of price-based monetary tools should give full consideration to the international capital flows, with particular attention to the impact of exchange rate stability; Finally, in order to make monetary policy more efficient, we need to further improve the financial markets.