Study On The Effectiveness Of Fed’s Unconventional Monetary Policy

Since December2008, the Federal Reserve’s traditional policy instrument, the target federal funds rate, has been effectively at its lower bound of zero, and there is no way to signal a change of policy to the markets using conventional open market operations. In order to further ease the stance of monetary policy as the economic outlook deteriorated, the Federal Reserve employed the unconventional monetary policy:interest rate commitment, large-scale asset purchases, credit and liquidity programs. Much of the recent policy debate on unconventional monetary policy has focused around the issue:can the unconventional monetary policy be effective and is there a spillover to China’s monetary policy?In this paper, the event study methodology and the VAR model are employed to uncover the practical effect of the Fed’s unconventional monetary policy. Based on the special features of the partial error correction model (P-VECM) and global error correction model (G-VECM), this paper analyzed the effects of the Fed’s unconventional monetary policy on the adjustment of China’s monetary policy and macroeconomic fluctuations, and it will provide a theoretical reference for Chinese government’s macro-control. The conclusions are as following:First of all, the practical effects of the interest rate commitment policy showed that:(1) The impacts of the federal funds rate commitment on financial market become more rapidly within shorter time, especially on stock market and commercial real estate market.(2)The commitment plays an important role in boosting consumer confidence and combating deflation.(3)The effects of the commitment on real econo my are greater than that on financial markets.Secondly, the practical effects of the large scale asset purchase program showed that:(1) Large asset purchase program can significantly lower long-term interest rates, but compared to purchasing the common treasury bonds, its role is not significant;(2) Large scale asset purchase may raise the inflation expectation, ease the deflation pressure, and stabilize the prices. Meanwhile it can place certain positive impact on output, but it is very weak and it’s role to stimulate the economic recovery is also limited.(4) The contribution of long-term interest rates to the changes of inflation gap and output gap has increased significantly after the large asset purchase.Thirdly, the practical effects of the credit and liquidity programs showed that:(1) Both Conventional tools and unconventional instruments play a more active role in the stability of the financial markets. Compared with the impacts of conventional tools, the effects of unconventional monetary policy tools to ease the pressure on the money market is more prominent, and the Ted spread can make a negative response more quickly to and it’s volatility is greater. At the same time, the contribution of the unconventional tools to the changes of the Ted spread, bank credit and money supply is more than that of conventional tools.(2)Both conventional tools and unconventional tools have played a positive role to the real economy recovery of the real economy to some extent. In which, the effects of unconventional tools on the economy growth can be presented after one year, and inflation expectations can be improved in the short term, but in the long run, the inflation can be curbed.(3) The impacts of the credit and liquidity programs implemented by the Fed on the financial markets are greater than that of the real economy, where unconventional instruments performed better than conventional tools.Finally, the impact of the Fed’s unconventional monetary policy on China’s monetary policy and macroeconomic fluctuations showed that:If both countries implement price-based monetary policy instruments, their directions of interest rate adjustments are consistent, interest rate adjustment is higher than that of the U.S. If they employ quantitative monetary policy tools at the same time, the adjustment directions of the two countries’ money supply are identical, but China’s adjustment is higher than that of the U.S. If the United States use price-based monetary policy instruments but China mainly implement quantitative tools, monetary policy adjustment will be impacted by the changes of it’s inflation in China, while Fed’s monetary policy is impacted much significantly by its output gap. The Fed’s low interest rates monetary policy will have a greater impact on Chinese monetary policy. China’s monetary policy, using money supply as the intermediate target, focuses more on the output gap in the short term, while inflation in the long-term. And since the financial crisis, the economic short-term fluctuations in return to it’s long-run equilibrium has taken three years. Furthermore, the repair function of the economic self-balancing in China and the United State are significantly enhanced since2010.To sum up, zero interest rate commitment and large asset purchase have greater impacts on the real economy than financial markets, while the impacts of the credit and liquidity programs implemented by the Fed on the financial market are more than that of the real economy. Throughout the analysis, U.S. monetary policy can be an effectively reference China’s monetary policy adjustments. There is a long-term equilibrium relationship between the two countries’ monetary policy. In practice, the interest rates smoothing function of monetary policy are well represented in the two countries.