Analysis Of The Effects Of Chinese Monetary Policy Based On MS-SFAVAR Model

The study of the effects of monetary policy is a core problem in the study of macroeconomics and finance. The depth of the reseach of monetary policy directly affect a country’s monetary policy practice, also related to the realization of the goal of macro-control. China’s monetary policy in the sense of money and banking started in1984when the People’s Bank began to play a role in central bank.Monetary policy is playing an increasingly important role in the past30years in china, but the effect of monetary policy sometimes is good and sometimes bad. The transmission mechanism of monetary policy is not entirely clear, the research of the response of macroeconomlc variables to the monetary policy shocks can promote our understanding of the monetary policy transmission channels and the effect of the policy’s ultimate goals, so the study has important significance.Since Bernanke, Blinder (1992) and Sims (1992) put forward VAR model and used the model to study monetary policy, a lot of literature have been using VAR model to measure the effect of monetary policy. Bernanke (2005) pointed out that the VAR model has at least three problems. Firstly because of the "curse of dimensionality" VAR model rarely use more than six variables, so that the model only used less information but monetary authorities and financial market participants master more rich information. Secondly variables used in the model can’t fully represent the variables in economic theory, such as the concept of "economic activity" can not entirely be represented using GDP or industrial added value. Thirdly, policy-makers always concern many variables, but due to the limited variable in VAR model the impulse response analysis to the variables is less.On the basis of the existing literature, this article uses the Markov Regime Switching Structural Factor-Augmented VAR (MS-SFAVAR) model to study the effects of monetary policy in China. Bernanke (2005) combined VAR model and factor model and put forward Factor-Augmented VAR (FAVAR) model, the model can effectively overcome the above three shortcomings of the VAR model, but the factor estimated by the model has no clear economic implications, therefore Belvsio and Milani (2006) proposed SFAVAR model so that the factor has clear meaning. Because of the China’s reform and opening up and the rapid development of economics, China’s economy has undergone different stages of economic development, so we use the Markov transition mechanisms to capture the changes may existed in the economic system. So based on the advantages of SFAVAR model and MS-VAR model we the MS-SFAVAR model to do empirical analysis. Selecting related monthly data of national economic output, the price level, the stock market, real estate market-related from January2000to January2012we collect86economic variables to do the empirical analysis of the effects of monetary policy in China.Firstly, we review the China’s currency policy practice in recent years and introduced the background and significance of the research, the elaborated the ideas, the methods and content of this research, and introduced ideas and research framework of this research, the structural arrangements of the article. Then we also reviews the theoretical study of monetary policy in the Western economic research, and reviews the related domestic and foreign literature. Secondly, on the basis of theory and literature review we apply the MS-SFAVAR model to do the empirical analysis of the effects of monetary policy in China, and then draw the relevant conclusions. Finally, this paper points out the inadequacies and further research directions.Using the MS-SFAVAR model we mainly draw the following conclusions:(1) there is a non-linear characteristics in the China’s economic system. The results of Markov mechanism model show that there are three obvious Regimes in China’s economy since2000. Analyzing the characteristics of the three Regimes we found that the Regimes respectively correspond to the "deflation","moderate inflation " and the " high inflation" three states in economy. Using the transition probability matrix, we found that our economy is more likely to show the state that form "deflation" to "moderate inflation" and to "deflation" in such a cycle fluctuations.(2) There are mystery of the price and mystery of the Price in our economy. The impact of interest rate on the output is not significant; money supply is significant in promoting the outputs, the stock and real estate.(3) The asymmetry effects of monetary policy exists. By doing the impulse response function analysis, we found that tight monetary policy is significant when the economy is in a state of high inflation.However when the economy is in the stare of deflation, the effect of monetary policy is greatly reduced, the expansionary monetary policy can do little about the economic recession and deflation. It is difficult to achieve the goals using the expansionary monetary policy in the state of "deflation".