A Theoretical And Econometric Analysis On The Correlative Mechanism Between Monetary Policy Rules And Business Cycle

The discretionary and ruled monetary policies are two important ways for the Central Bank to proceed macroscopic control. Discretionary monetary policy means the Central Bank takes discretionary measures to achieve its goal, after making a judgment of the real economy. However,the discretionary adjustment of nominal interest rate is not systematic, it may dramatically reduce the transparency and credibility of monetary policy, which can affect the public to form a stable expectation and finally has a passive impact on the effect of monetary policy. In contrast, ruled monetary policy means the Central Bank makes the policy adjustment mechanism beforehand,and then adjust the nominal interest when the economic condition has changed. On this occasion,this kind of policy mechanism will have a systematic influence on public expectation, form a constraint for the opportunism and short-term orientation of the Central Bank, and finally contract economic fluctuations through a minor adjustment.Thus it can be seen that a study on the relationship between ruled monetary policy and the business cycle can help economic actors identify the objective laws of the Central Bank’s policy operations, form a stable policy expectation, and help the monetary authorities to enhance the transparency and credibility of their policy operations, improve policy effect, and finally achieve reducing economic fluctuations, controlling inflation and maintaining macroeconomic stability.Actually, the research on the relationship between ruled monetary policy and business cycle has always been a topic among academia as well as policy makers. Especially in recent years, the continuous reduction of interest as well as reserves and the invalidation in Quantity Theory of Money have made us reexamine the relationship between ruled monetary policies and the business cycle. Moreover, since the FED(The Federal Reserve) and the ECB(European Central Bank) gradually began to use "Zero Lower Bound" and "Quantitative Easing", a new revolution in money has started. The limited fluctuations in exchange rate and the limitless expansion in credit can certainly cause structural contradictions, and finally change the interest rate as well as money supply of one nation. On this account, this paper will reexamine the relationship between ruledmonetary policy and business cycle under the current macro-background, according to the logic of "raise of issue→description of facts→deduction of theory→expansion of theory→simulation of theory→summary of reality", and finally come to the conclusions bellow:Chapter one makes a systematical introduction of ruled monetary policy and the business cycle, and also makes a detailed introduction of their development history. Later on, we make a systematic literature review in this chapter, according to the logic of "the classical research on the relationship between ruled monetary policy and the business cycle→the new kind of influencing mechanism between them and the Modern Recession→monetary policy adjustment during typical economic fluctuations in China". And finally, the full text structure is given.In chapter two, we make a comparison on some core macro-economic indicators between the present stage and the “soft-landing” period in 1996, and then make an estimation of its duration.In addition, we have also measured the influence of world economic fluctuation on China’s economy under the current world macro-economic environment. We consider that from the later period of the 12 th Five-Year Plan, China’s economy will form a new round of "soft-landing", and the level of the "soft-landing" nowadays will be lower than last time. Moreover, the duration after this round of “soft-landing” may extend prominently which is going to influence the development pattern of the 13 th Five-Year Plan directly.After a deep research on the fluctuations of business cycle as well as its formation mechanism, this paper steps into its core part. In Chapter three, we use TVP-VAR model to study the time-varying influence of world economic climate change on real output growth rate in our nation; and then, make a comparison on the validity of macro-control policies. The research shows that the impact of the world economic climate change only has a short-run effect, it is an irresistible trend of economic development in developed country, but has a weak correlation with Chinese economic transition. Therefore, we should treat this phenomenon with a rational perspective, focus on our own development. Finally, from the angle of monetary policy adjustment, changing broad money supply may face with high welfare costs, interest rate adjustment and the anticipated credit supply are still moderate controlling measures when taming economic fluctuations.Chapter Four to Chapter Five makes a systematically research on the relationship between ruled monetary policy and the business cycle. Chapter Four is a monographic study on the cost ofmonetary policy. In this chapter, we add the exponential terms of output gap and inflation gap into the welfare loss function of the Central Bank, and test the asymmetric character as well as the inertia area of it. Later on, we employed a TVP-S-VAR model under the hypothesis of rational expectation to measure the Center Bank’s interest rate rule under different macro backgrounds,finding that the Center Bank tends to strengthen its monetary policy control during a deflation and pay more attention to the persistence of monetary policy in the "New Normal" period, so that make a palm for economic growth and also set aside necessary time for the whole upgrade of economic structure and the reform.In Chapter Five, we have developed a international comparison on the relationship between ruled monetary policy and the business cycle. This chapter makes a multiple threshold test on monetary authorities’ monetary policy rules of China and the U.S during the periods of the "Great Moderation", "Economic Soft Landing", and the "Modern Recession", finding that the nominal interest rate adjustments of the two countries’ monetary authorities have an obvious asymmetric preference at different stages of business cycle. During the boom, both of the two monetary authorities’ nominal interest rate adjustments have a preference for avoiding inflation, and their monetary policy operations will emphasis on output gap during an austerity. Later on, for further study on the validity of FED’s nominal rate adjustments in smoothing economic fluctuations, this article employs a LT-TVP-VAR model to estimate a time-varying parameter Monetary Policy Rule under the New Keynesian framework again. The results show that the FED can not obtain a counter-cyclical expansion only through nominal interest rate adjustment when coping with the "Modern Recession". The monetary authorities should employ "Forward Guidance", "Operation Twist" and "Quantitative Easing" to enhance economic vitality and fuel economic growth when restraining economic sliding under the current macro-economic background.Chapter Six to Seven steps into the theoretical simulation part of the paper, which mainly tends to make a deep discuss on the current asset price fluctuations. In Chapter Six, by augmenting the standard New Keynesian Monetary Model with asset price and heterogeneous traders, we make a numerical simulation on this model through check analysis, finding that the proactive policies are the suboptimum choices for monetary authorities when they cannot monitor the exact state of stock market in time. Moreover, comparing with the interest rate rule which makes an ex post intervention for asset price misalignments, the economic system can achieve aboth determinate and stable equilibrium much easier with the interest rate rule considering asset price. Therefore, the monetary authorities should pay high attention to the guiding function of monetary rules, set a stable expectation for the public and ensure the validity of its policy adjustment.Chapter Seven makes a deep discuss on the base of Chapter Six. In this chapter, we first make a correction on the classical Tobin’q theory, separating the asset’s basic value from it’s speculative value, and then build a forward looking monetary police rule with asset’s basic value under a DEGE framework to make a necessary discussion. The results show that nominal interest rate adjustment has a prominent effect on promoting asset value restoration, and then pulls real economy recovery. And the main cause of capital market going active with the real economy recovering slow at this stage is the mismatch between the real business cycle and the financing cycle. However, we should also not ignore the negative impact of huge asset price volatility on financial stability. Therefore, the monetary authorities should pay high attention to policy guidance beforehand, preventing the investors from making excessive policy interpretation, so that we can play the positive guidance function of monetary policy and maintain financial stability at the same time.Chapter Eight is the last chapter in the paper. In this chapter, we use a large amount of macro economic index and TVP-FA-VAR Model to do the research, and make a detailed summary on the relationship between ruled monetary policy and the business cycle. The results show that both interest adjustment and changes in money supply can smooth output fluctuations. Among these,the output responds more direct to price changes with a faster reaction, but the influences of broad money supply changes on economic fluctuations are more complex, whose effects depends more on the specific changes in different items. Therefore, broad money supply changes are no more suitable indicators for monitoring the influence of money supply changes on business cycle.