The Analysis Of Effectiveness Of U.S.Quantitative Easing Monetary Policy

2007-2009financial crisis subdues the US economy into18-month recession. It becomes the longest recession that the US has experienced since the World War Ⅱ. To confront financial crisis and economic recession, the US government, the Federal Reserve in particular, has conducted a series of active macroeconomic policies to stimulate aggregate demand, so that the economy will return to the pre-crisis track soon. This dissertation treats the Fed’s quantitative easing monetary policy till2013as the research subject. The analysis of its effectiveness is conducted through the magnitude of quantitative easing monetary policy on certain key macroeconomic variables such as GDP and inflation. To be specific, it includes the following three areas:(1) to define US quantitative easing monetary policy and its effectiveness;(2) to analyze the transmission channels of quantitative easing monetary policy; and (3) to investigate the effectiveness of quantitative easing monetary policy by DSGE model and structural vector auto-regressive (SVAR) econometric model.First, the definition of US quantitative easing and its effectiveness. For definition, the Fed’s quantitative easing monetary policy includes zero interest rate policy, forward guidance and large scale asset purchase programs. Zero interest rate policy is to eliminate possible economic fluctuations caused by short-term interest rate change; forward guidance to clarify current economic conditions, and the stance of monetary policy; and large scale asset purchase programs, in terms of the expansion of central bank’s balance sheet, to provide loosening credit environment for economic recovery. All three actions are interlinked and influence on each other. Zero interest rate policy and forward guidance supports the reduction of uncertainty in policy crafting. Large scale asset purchase programs stabilize asset price on the one hand, and stimulate consumption and investment on the other, together bringing about increased employment and GDP growth. Next comes the definition of effectiveness of monetary policy. The effectiveness indicates whether its magnitudes on model (theoretical model and econometric model) economy’s variables such as GDP and inflation is significant. Therefore, the effectiveness in this dissertation is more on the effect of quantitative easing monetary policy, rather than that on specific sector or industry.Second, the analysis of the transmission channels of quantitative easing monetary policy. With asset imperfect substitution in financial markets, the Fed’s large scale asset purchase programs is able to lower that market long-term interest rates. Consumption and investment in aggregate demand are closely related with long-term rates. Lower long-term rates creates the chance of consumption and investment’s rebound. Expectation management is the second transmission channel. Economic agents are forward-looking. The economic decisions are not only constrained by current resources, but also economic activities in the future (e.g. interest rate path or monetary base growth). Hence it optimizes economic decisions if central bank is willing to communicate effectively about the economic prediction, the stance and actions of monetary policy to the public. Financial intermediate is the third transmission channel. It increases economic fluctuation (i.e. financial accelerator effect). To stabilize financial intermediate is one operating target in quantitative easing.Third, the effectiveness of quantitative easing monetary policy in DSGE model and SVAR econometric model. DSGE model analysis comes first. This dissertation takes a medium-size New Keynesian DSGE model as an approximation of US economy, and make several assumptions as follows. The first assumption is to add portfolio transaction cost to resemble portfolio rebalance channel. The second assumption is to have long-term and short-term bond supply as large asset purchase program proxy. The model introduces two monetary policy regimes to investigate the effect of zero interest rate policy. The monetary policy in the first regime follows Taylor’s rule as usual, while zero interest rate in the second regime. The two regimes switch by an implicit Markov chain. The focus of the research is economic responses under the second regime. The third assumption is perfect knowledge of monetary policy regime by economic decision makers. It is considered as central bank’s forward guidance. The fourth assumption is the quantitative easing monetary policy has stabilized financial system. So the financial intermediate channel is supposed to function well. Combined the above assumptions, the DSGE model analyzes the effectiveness of quantitative easing monetary policy by comparing the following scenarios:(1) the impulse responses of model economy when having negative demand shock and without any policy intervention;(2) the impulse responses of model economy when taking large asset purchase programs, but no zero interest rate policy and forward guidance;(3) the impulse responses of model economy when having negative demand shock with quantitative easing (i.e. zero interest rate policy, forward guidance and large asset purchase programs);(4) the impulse responses of model economy when having negative demand shock with fiscal stimulus. By comparing the magnitudes of economic variables responses, i.e. GDP, inflation, consumption and investment, the dissertation concludes that quantitative easing monetary policy is effective in theoretical sense. SVAR empirical study follows next. SVAR is treated as the benchmark of DSGE model. Compared with DSGE model, SVAR has a fewer restrictions on estimated parameters, which helps to explore the internal dynamic connections from data itself. The dissertation picks6series of US data, which are real GDP per capital growth, inflation rate, working hours per capita, short-term and long-term interest rates, and monetary base (M1), from2008Q1to2013Q4, to form the SVAR model for estimation. The data process above guarantees the comparability of impulse responses between SVAR and DSGE model. The investigation of the effectiveness of quantitative easing monetary policy is accomplished by sign restriction on impulse responses. Based on the analyses of DSGE model and SVAR empirical study, the dissertation concludes that US quantitative easing is effective.In the last section, the dissertation presents policy suggestions for Chinese monetary policy based on the research on US quantitative easing monetary policy. The policy suggestions includes two parts. The first part is the enlightenment for Chinese central bank based on US monetary policy. The second part is suggestions for effectiveness improvement for Chinese monetary policy. The most important is for financial system’s structural reforms. The purpose of such suggestions is to broaden and enhance the transmission channels of Chinese monetary policy, in order to increase the effectiveness of Chinese monetary policy.