The Combination Of Policy Instruments In The Coordination Of China’s Fiscal And Monetary Policies

During the process of dealing with the impact of crises such as the 2008 financial crisis and the COVID-19 pandemic since 2020,countries around the world have realized that the two crises are different and therefore have adopted different combinations of fiscal and monetary policies.China’s economy has been hit hard by the COVID-19 pandemic,with increased economic volatility,suspended market trading activities,and many businesses suspending operations,leading to a liquidity crisis for small and medium-sized enterprises and significant setbacks for the real economy.As the financial market and the real economy are closely related,the accumulating default risk may trigger systemic risks.Therefore,effective coordination of fiscal and monetary policies can play a huge role in overcoming crises and ensuring stable economic operation.Additionally,as China is undergoing a transition in its monetary policy framework,both quantity and price-based monetary policies may coexist,and their combination with fiscal policies may be different.Thus,studying the combination of fiscal and monetary policy tools under the framework of monetary policy transition is of great significance for enhancing the effectiveness of policy implementation.This thesis is based on the research project "Joint Research by Ministry and Provincial Departments" of the Ministry of Finance,titled "Coordination Mechanism and Its Impact of US Fiscal Policy and Monetary Policy." Drawing on the theoretical foundations,coordination mechanisms,and historical practices of fiscal and monetary policy coordination,this thesis uses government spending and tax revenue as fiscal policy tools,and the money supply and interest rates as monetary policy tools.It investigates the interactions between the money supply as a monetary policy tool and the two fiscal policy tools by constructing a vector autoregression(VAR)model.Simultaneously,it explores the time-varying characteristics of interest rates in fiscal-monetary policy coordination and its interactions with the two fiscal policy tools by constructing a time-varying parameter vector autoregression(TVP-VAR)model.The research aims to explore how to combine fiscal and monetary policy tools during the transition of the monetary policy framework to optimize the implementation effect of policies.The study found that:(1)There are still problems in the coordination of fiscal and monetary policies in China,such as the imperfect government bond market and management system,incomplete financial regulatory system reform,and the impact of price-based monetary policies on the original policy system.(2)When combining the money supply and government spending,the attenuation time of their mutual impact and the attenuation time of their impact on economic growth are quite close,both between the 8th and 10 th periods,indicating a more consistent policy control cycle.However,when combined with tax revenue,although the impact on each other is relatively smaller,the attenuation time of their mutual impact and the attenuation time of their impact on economic growth differ greatly,ranging from the 6th to the 11 th periods,indicating less consistency in the policy control cycle.This indicates that the money supply,government spending,and tax revenue each have their advantages when combined and implemented.(3)The impact of interest rates on economic growth and fiscal policy tools has significantly increased since 2018,indicating that interest rates have time-varying characteristics in the coordination of fiscal and monetary policies.When combined with government spending,the mutual impact between the policies is relatively smaller compared to tax revenue,and they are more consistent in the policy control cycle,both between the 10 th and 11 th periods,indicating that interest rates are more suitable to be combined with government spending.Based on the aforementioned research,to strengthen the ability of fiscal and monetary policies to regulate the economy,this thesis proposes the following policy recommendations:(1)clarify the responsibilities of fiscal and monetary policies and improve the institutional and management framework;(2)expand the toolbox of fiscal and monetary policies and unblock policy transmission channels;(3)select appropriate combinations of fiscal and monetary policy tools based on practical needs.