Research On The Monetary Policy Coordination Between China And The US

This paper comprehensively analyses the monetary policy coordination between China and the US on the basis of relevant literature. Applying theoretical and empirical analysis methods, the paper manages to answer the five main questions as follows:(1) Why should the monetary policy coordination between the two countries be studied? (2) Does the spillover effect exist as a result of the bilateral impact of Sino-US monetary policy? (3)Will the monetary policy coordination bring proceeds for both China and the US? (4) What are the appropriate programs for Sino-US monetary policy coordination? (5) What policy recommendations would be drawn from the analyses in this paper?Firstly, the thesis has made a systematic review of the theoretical literature on monetary policy coordination, examining the spillover effect of monetary policy and the analytical framework of monetary policy coordination according to the available literature. In an open economy, M-F-D model and NOEM model are two major models applied to the study of the spillover effect of monetary policies. The M-F-D model is simple and straightforward; it lacks micro-basis and only has the restricted ability to explain and forecast. And the NOEM model can be applied to welfare analysis in a strict sense, overcoming the defects of MFD model. Comparing both the models, the thesis believes that the NOEM model, as an analytical paradigm, is more suitable for analyzing the spillover effect and coordination of the monetary policy between China and the US.Secondly, with the help of SVAR model, the thesis has empirically studied the spillover effect of the bilateral impact of monetary policy of the two countries. Research has it that the American tightening monetary policy will bring negative effect on China's output; restrain China's exports and imports through the combined effect of the income absorption and expenditure switching and ultimately worsen our trade balance. The variance decomposition shows that the negative effect on output caused by American tightening monetary policy exceeds the other three areas. China's expansionary monetary policy will have a positive effect on American output; increase the demand for American imports through income-absorbed effect. And expansionary monetary policy will also make currency depreciation; decrease the demand for American imports through expenditure switching effect. The combined function of the two effects will have negative effect on American net exports. The variance decomposition also shows that, relative to the other three variables, China's monetary policy exerts a larger influence on the net exports of United States.Thirdly, the thesis analyses theoretically the welfare yield brought from the coordination of Sino-US monetary policy, using NOEM as an analytical paradigm. The findings indicate that the monetary policy coordination will bring potential welfare gains when the elasticity of demand between the products from different countries is greater than 1 1 and the correlative coefficient of the impact of labor supply is less than 1; the monetary policy coordination will bring no potential welfare gains when the elasticity of demand between the products is equal to 1 or the correlative coefficient of the impact of labor supply is equal to 1. If both the countries want to implement tight monetary policies to increase their level of benefits, the solutions to the coordination of monetary policy are unstable.Finally, this paper analyzes how to choose the programs of Sino-US monetary policy coordination. Based on the way for policy coordination, the coordinated mechanisms of international monetary policy can be divided into two categories: discrete coordination and regular coordination. Under current conditions, discrete coordination is the option of the mechanism of monetary policy coordination between China and the US. At the same time, considering the stability and the flexibility of coordination, this paper regards the program of exchange rate target zone as a more appropriate choice. The core of the program of exchange rate target zone is primarily to measure the fundamental equilibrium exchange rate, which is an important factor for determining the width of the target area. Given the fluctuation in the RMB exchange rate and domestic macroeconomic situation, the thesis argues that the exchange rate target zone range of Sino-US monetary policy coordination could be set to 15% up or down upon the model (Elbadawi,1994) about the equilibrium exchange rate for developing countries.