Research On The Effectiveness Of China’s Monetary Policy

As the major factor in regulating and controlling macroeconomy, monetary policy attracts an increasing number of people’s attention around the world. As the implementation of monetary policy will affect the stabilization of local economy directly, monetary policy plays a more essential role in stabilizing the operation of macroeconomy at present. In China, the importance of monetary policy needs to be concerned because of the following reasons. First of all, the speed of global economic growth became slowly because of financial crisis came up globally. In such circumstance, China employed moderately loose monetary policy and invested4trillion Yuan in order to expand domestic demand. Further more, the economic monetization problems in Chinese economy turned more seriously. Specifically, since reform and opening up, the growth rate of the supply of money surpassed this figure in gross domestic product significantly. Especially in recent years, with the increase of foreign exchange reserve, the appreciation of RMB, the bubble of real estate and the emerging of hot money, the "excess currency theory" becomes even more violent. Therefore, whether monetary policy could introduce effectively, how to make monetary policy executes more successfully and to what extent Chinese economy depends on money supply deserve to study not only in theoretical meaning but also in practical influence.This thesis will first review some previous studies about the effectiveness of monetary policy and the degree of economic monetization. Thus it finds out some deficiencies in those papers and presents this dissertation’s own analytic method. The second part is based on the analysis of the effectiveness of monetary policy and the periodic analysis of our country’s monetary policy. After that, chapter3is one of the most important parts of this paper. According to co-integration test, Granger causality test, VAR model and impulse response function and variance decomposition, it will elaborate the relationship between the supply of money, actual output and commodities’ price in China in order to verify the effectiveness of monetary policy in China. It will adopt M0, M1and M2as intermediate targets with GDP and CPI as ultimate goals during the period between the first quarter of1994to the forth quarter of2012. Chapter4will be the final essential section in this thesis. Based on the analysis in chapter3, it will explore the degree of China’s economic monetization and study its causes in further. Also, this sector will discuss the mount of money supply in China basing on the steady economic growth (assumed to maintain a growth rate of7%-8%or8%-9%) according to the data from1978to2012. Finally, chapter5will present the conclusion and some policy implications.According to the studies in this paper, there are some findings. First of all, monetary policy is effective in China since1984to some extend, removal of the policy overshoots or not obvious in some phases (such as1989-1990and so on). According to empirical tests also have come to the conclude that Chinese monetary is effective since1994;M1and M2still can be used as the intermediate target of monetary policy while MO is neutral at this stage in our country. The influences of different diameter of the money supply on real economic output are at different levels, M2on the actual contribution of the maximum output of up to31.94%, while the M1maximum of up to9.16%; The role of monetary policy in China has lag. The output effect of M1delay is four quarters while M2delay is three quarters, and both of their price effect delays are eight quarters; then, the high speed of the increase of money supply could influence commodities’ price but would not lead to serious inflation. The endogenous of money supply was enhanced and this figure of M2surpassed that of M1, and it affects the effectiveness of monetary policy to a certain extent. More importantly, the "excess currency" in China was the result of economic structural imbalance and the low level of financial system development. According to currency composition factor, economic factor, institution factor and statistical techniques factor, the level of economic monetization was increased in China. At last, it could be conclude that, the increase of money supply was suitable in China at present. Nevertheless, the disadvantages of high speed of the increase of money supply should be concerned, such as inflation, overcapacity, real estate and financial asset bubble and so on.