A Study Of Monetary Policy’s Non-linearity In Liquidity Adjustments

The price growth rate of China has been at a higher level in recent years. In2007; Chinese CPI growth rate reached a maximum of8.7%, while in2011CPI maximum growth rate has reached6.5%.So adjustment of monetary liquidity, and to keep it at a reasonable level, became the key work of central bank’s monetary policy operation in recent years. In this context, the central bank’s liquidity regulation faces increasing pressure, and liquidity management is becoming the theme of the central bank’s monetary policy. In2011, the central bank raised the deposit reserve ratio six times, and raised interest rate three times only in one year, to control excess monetary liquidity in economy. The control efforts are rare in the world, and the effect of monetary policy has also attracted more and more attentionIt is generally believed that the monetary policy transmission process can be divided into two stages. First, monetary policy tools influence the intermediate target, and then achieve the ultimate goal of the policy through the regulation of the intermediate target. As our central bank uses money supply as an intermediate target, the first stage of the monetary policy transmission can be seen as the regulation of currency liquidity through monetary policy operations, while the second stage can be seen as the process monetary liquidity influences the real economy.There may be some nonlinear characteristics in the conduction process of monetary policy. Nonlinear Studies on monetary policy has focused on the second stage of the conduction process in the past, and that is to say in the different periods the impact of monetary liquidity on the real economy will also be different. Some study found that, in the economic rise period the tightening monetary policy to restrain economic overheat is effective, but the effect of expansionary monetary policy to stimulate economic growth in a recession is not so obvious. These nonlinear characteristics can also be called monetary policy asymmetry. This paper argues that there may be nonlinear characteristics in the first stage of the monetary policy transmission process, too. In different economic environments under the effect of the central bank’s monetary policy regulation of the monetary liquidity, which is the intermediate target, may be different. This difference will affect the efficiency of the central bank’s monetary policy, and make the liquidity management more difficult.This paper does empirical research on the nonlinear problem in the liquidity regulation process. As there is nonlinearity in economy, the application of traditional linear model will be subject to many restrictions. In this case, it is difficult to achieve the desired results. This paper takes data such as deposit reserve ratios, benchmark interest rates and open market operations and uses them in the MS-VAR model in order to segment China’s various liquidity conditions into three tiers:a) periods of slow monetary liquidity growth, b) periods of moderate monetary liquidity growth and c) periods of rapid monetary liquidity growth. On this basis, we test whether monetary policy instruments that adjust liquidity have differing effects under different liquidity conditions. The empirical results show that, in China, the benchmark interest rates and the open market operations are more effective during periods of rapid monetary liquidity growth while, conversely, the effectiveness of deposit reserve ratio is less effective. Therefore, the Central Bank should exercise discretion when implementing its monetary policies.The specific structure of this article is as follows:The first part is an introduction. This chapter at first introduces the background, the theoretical and practical significance of this paper’s the research topic, and clarifies the writing ideas and research methods. Then, it analyses the innovation and inadequacies of this paper and points out some of the problems that can be studied in the future.The second part is the domestic and international literature review. This chapter divides the related references into the theoretical foundations and model set, and then introduces the domestic and foreign research in every part. The third part is the theoretical analysis and model overview. This chapter firstly theoretically analyses the mechanism through which our monetary policy tools’influences the liquidity. Secondly it explains the meaning and causes of the non-linear characteristics of the monetary policy operation, and then describes the performance of this nonlinear in the economy. Finally, it gives a simple introduction of MS-VAR model used by this paper.The fourth part is the empirical research. This chapter firstly introduces the indicators selected by the model and data sources. Secondly it uses the stationary test and the Johansen test to give a preliminary investigation of these data, and analyses the relationship between the variables through the Granger causality test. Finally we use the MS-VAR model to analyze the impact of monetary policy tools on monetary liquidity in different regimes, and examine the nonlinearity’s existence through LR test, analyzing the role of monetary policy tools in different regimes through the comparison of the model’s parameters.The fifth part is the empirical results and policy recommendations. This chapter firstly analyzes the results of the empirical test combining with the reality, and discusses the causes of the non-linear characteristics of monetary policies in different regimes. Finally, we put forward a number of policy recommendations to help the central bank select the optimal monetary policy tools at different times, and improve the efficiency of liquidity management, according to the model results of empirical research.The sixth part is the conclusion. This part gives the summary and conclusions of the article’s writing process, pointing out the limitations of the article and future directions for further research.