Research On The Transmission Mechanism Of China's Monetary Policy Under Open Conditions

Monetary policy is one of the most important macro-control policy instruments.The research and analysis of its transmission mechanism and to find out what makes monetary policy not play a better role,thus to improve or eliminate these unfavorable factors,while more profound understanding and grasp of its mechanism and operation of the law will help us improve its transmission mechanism.The development and implementation of more professional monetary policy is conducive to the improvement of economic structure,promote balanced economic development and improve the welfare of the residents.Since the end of 2001 China's accession to the WTO,financial liberalization has been deepening.China's implementation of interest rates and exchange rate policy is facing severe challenges and its effect has not been fully played and offset by the increasing domestic and international capital flows.Our central bank is finding suitable measures for China's monetary policy in the increasingly complex economic environment now.The central bank has been trying to maintain balance of the four macro-control objectives,which are economic development,price stability,full employment and equilibrium of international payments,through the adjustment of the legal deposit reserve ratio,open market operations,re-lending and other monetary policy instruments.The complex situation at home and abroad determines that the monetary policy will be adjusted constantly.In this context,the research on the transmission mechanism of China's monetary policy can better analyze the unfavorable factors that hinder its role,so as to make better use of monetary policy regulation.On the basis of predecessors' research,the paper systematically summarizes and analyzes the changes of the operating environment of monetary policy transmission mechanism in China in the past 15 years since 2001.It summarizes the characteristics of monetary policy transmission mechanism in this period and uses empirical analysis to examine the transmission mechanism of China's monetary policy under open conditions from January 2002 to July 2016,which are totally 175 monthly data.This paper aims to analyze the transmission mechanism of monetary policy and regard the internal conduction and external conduction as the research framework,then measure the long-term and short-term efficiency of the monetary policy transmission mechanism in China.Based on the VAR and ECM model,the paper analyzes the internal and external transmission mechanism of China's monetary policy through time series measurement method.The other methods involved are ADF test,multivariable continuous system identification method,bivariate Granger causality test,Cointegration test,Almon estimation,impulse response analysis(IRF)and variance decomposition.The innovation of this paper lies in defining the connotation of the monetary policy transmission mechanism according to the classical theory and practical experience of monetary policy.The issue of monetary policy transmission mechanism is full of macroscopic and holistic.In the process of research,the author divides it into two parts:internal conduction and external conduction,which is the whole foundation of this study.Both the review and summary of the characteristics of monetary policy and the empirical tests are carried out in this framework.In the past,most of the research on the monetary policy transmission mechanism was based on the money supply,and studied its influence on the ultimate goals.The transmission mechanism between the money supply and the final goal was always like the "black box" which was not found on the plane.The paper integrates the relevant literatures and introduces five key variables-the credit outstanding,interest rate,exchange rate,house price and stock price to get through the channel between the money supply and the final goals,what will help us to see in which link the monetary policy transmission mechanism is efficiently damaged more clearly.Through the study of the internal transmission mechanism and external transmission mechanism of China's monetary policy,we can draw the following conclusions:(1)In the process of internal transmission of monetary policy,the relationship between the legal deposit reserve ratio and the base currency is contrary to the economic theory.The long-term effect of the legal deposit reserve on the base money is poor and its role may be reversed by the role of other monetary policy instruments,such as foreign exchange,since China's foreign exchange reserves have been at a stage of rapid growth in the sample range.(2)In the sample area,the long-term effect of the legal deposit reserve interest rate on the base currency is much higher than the foreign exchange and re-lending.From the perspective of monetary policy practice,China's legal deposit reserve rate has been higher,and the adjustments of the range and frequency are not much.To the deep-seated analysis,China's higher legal deposit reserve interest rate,to a large extent affects the commercial bank's balance sheet,especially in the tightened economic situation,which will potentially stimulate the commercial banks to reduce the loans.They are willing to deposit directly in the central bank to earn a relatively stable income,which makes the amount of excess deposit reserves increase significantly.The increase in excess deposit reserves will not only weaken the effect of the legal deposit reserve ratio on the base currency,but also affect the money supply by influencing the money multiplier,which explains why the effect of the legal deposit reserve ratio on the base money is not significant,while the long-term effect of the legal deposit reserve interest rate is more stronger.(3)In the external transmission mechanism of monetary policy,the money supply M1 and M2 have long-term conduction effect on credit,interest rate,exchange rate,house price and stock price.The money supply M2 is much more influential on each key variable than M1.The long-term effect of money supply on key variables is better than short-term effect.(4)In the process of conducting key variables of external transmission mechanism to the final goal and its components,the real estate price transmission mechanism is stronger,the credit transmission mechanism is second,the interest rate transmission mechanism of money market is weak,and the influence of the exchange rate transmission mechanism has improved,the effect of the stock price is weakest.(5)This paper also studies the direct transmission mechanism of intermediate target to the ultimate goal,which implies the influence of credit,interest rate,exchange rate,house price and stock price,in order to reflect the overall effect of external transmission mechanism of monetary policy.Both M2 and M1 have strong Granger causality relationships with nominal GDP,real GDP and consumer price index CPI.Under the open conditions,the external transmission mechanism of China's monetary policy is effective in the long run,and the conduction effect of M2 is better than M1.In the short term,the effects of M1 and M2 on real GDP and nominal GDP are not significant,which indicates that in the short run,the external transmission mechanism of monetary policy is not smooth.As intermediary targets,M1 and M2 have weak control of the output.These conclusions not only rich and perfect the existing monetary policy theories,but also contribute to design and implement more scientific and effective monetary policy in the future.