A Study On The Macroeconomic Component, Macroeconomic Shocks And The Validity Of Monetary Policy

For a long time, the study of the correlation mechanism between inflation and monetary policy has been a focus of academics and policy makers. Among them, the Mc Collum rule and Taylor rule have laid an important theoretical foundation for the studies in this field. Subsequently many scholars have carried out extended studies on the basis of this two empirical models, and found that rule-based monetary policy can effectively stabilize inflation and output volatility. However, it needs to be point out that there is a common drawback in a majority of previous studies: they replaced the inflation by CPI to study the effectiveness of monetary policy rules, but leakage would exist in asset prices and producer prices by using this substitutive index, which would lead to the model fitting’s lack on the economic meanings level, and thus can not fully seize the intentions of the central bank’s policy operations. Therefore, this paper will re-examine these two issues based on the perfections of the inflation index construction and further understanding of the effectiveness of monetary policy rules.This paper is divided into six chapters, the first chapter is the introduction of this paper, it systematically introduces the structural problems in the process of China’s current inflation(deflation) management, and points out the shortcomings of the price-level monitoring by using the traditional PPI or CPI index instead of inflation. At the same time, it summarizes the studies about the deviation of CPI and PPI, and point out the core purpose of this paper, and classifies the studies about the key mechanism of monetary policy and inflation in the past, which lay a theoretical foundation for the following study of this paper.The second chapter, from the perspective of monetary policy rules, inserts CPI and PPI into monetary policy rules respectively to explore the nonlinear characteristics and effectiveness of regulatory mechanisms of the monetary policy to the two rates. The results show that according to the change of CPI and PPI, the nominal interest rate adjustment has an obvious asymmetric preference, which is a part reason of the deviation between CPI and PPI. In addition, according to the current trend of CPI and PPI, the volatility of CPI is relatively stable and in a controllable range due to the rigid feature of nominal wages and agricultural prices, but affected by traditional industrial overcapacity, PPI has been falling for several months, and did not show an obvious reversal. Therefore, the monetary authorities should attach great importance to the deviation between the CPI and PPI, and pay more attention to the regulatory effect on PPI in the process of the nominal interest rate adjustment.The third chapter continues the second chapter, from the perspective of mixed-frequency data, it specifically analyses the stabilizing effects of monetary regulation and control on CPI volatility and PPI volatility(including regulation and control’s dynamics, time and subsequent effects), and contrasts the mixed frequency data model with the traditional model on accuracy, which provide new methods and ideas for this field. The result shows that using mixed frequency data model can improve the parameter estimation precision of the VAR model, and can effectively reduce the confidence interval of the impulse response.The fourth chapter also continues the ideas of the second chapter and the third chapter, and uses the Time-Varying Parameter Vector Autoregression model(TVP-VAR). It mainly discusses the difference of the stabilizing effects of monetary policy on CPI volatility and PPI volatility in different time. The result shows that affected by the excess of broad money supply at the present stage of China, the government and monetary authority have been more cautious to the use of the gross regulation and control of monetary policy. From the point of view of the policy dynamics, the current broad money supply adjustment still can effectively stabilize the CPI and PPI volatility. But the policy dynamics have been significantly weakened than before, and the policy duration has been obviously prolonged, which show that the current monetary regulation and control pays more attention to preset adjustment and fine tuning, rather than strong stimulation in the short term. In addition, by contrasting the monetary regulations of China’s typical stages of economic fluctuation, it can be found that during the subprime crisis, the policy dynamics were strongest, but it would face the constraint of long-term welfare cost. Therefore, researchers and policy makers should attach great importance to the relationship’s change of the economic variables at different levels, and reduce the short-term strong stimulus measures, thus making monetary policy more effective.The fifth chapter summarizes the conclusions above, and points out the disadvantages of using CPI or PPI alone to monitor inflation. Then from the perspective of index fitting, it uses the FAVAR model to calculate inflation’s the macroeconomic components and shocks in China. The result shows that the volatility of agricultural products prices can explain a majority of inflation volatility in China, which indicates that only using the CPI index for inflation monitoring can reflect the central bank’s policy intentions. But by comparing the CPI with the core inflation index, it can be found that since the negative growth of PPI in 2013, the effect on our country’s core inflation index has become more and more prominent. As things stand, China’s inflation level has been fluctuating around zero line measured by core inflation index, and China’s macroeconomic operation will face greater deflation pressure in the future.The sixth chapter is based on the construction of the core index in the fifth chapter, it uses DSGE model to explore the effectiveness of money price rule and quantity rule’s stabilizing effect on the core inflation. The result shows that the price rule and quantity rule can effectively stabilize core inflation volatility, but the use of quantity rule regulating the inflation will be faced with the constraint of long-term welfare cost, which is the fundamental reason for the central bank to take the nominal interest rate adjustment and the prudent broad money supply at the present stage. But it should be point out that the nominal interest rate adjustment has a constraint of the zero rate lower bound, so the price adjustment also should not be excess. As for the monetary policy choices, the central bank should pay more attention to the management of public expectations, enhance the credibility of the policy, stretch the term structure of interest rate cut cycle, and adopt asymmetry ways to regulate deflation, so as to ensure that the central bank, under the premise of the adoption of moderate monetary policy, completes the prevention and governance of the current deflation.