Research On Monetary Policy Transmission Mechanism Under Market Integration In China

In recent years, with the deepening of China's financial reform and perfection of financial system, monetary policy is playing a more and more important role in macroeconomic control, and the study of monetary policy transmission mechanism has been widely concerned. Western countries are increasingly relying on monetary policy to adjust macro-economy mainly because that their market integration provides a solid foundation for the full effects of monetary policy. China, whose economies are in the transition, has been long-turn under administrative intervention and planning system with its market being in a seriously segmented state, which cause the monetary policy transmission channels impeded and monetary policy regulation inefficient. However, the modern market economic theory suggests that, monetary policy will play a greater role in regulating national economy as it develops. Thus, in recent years, our government has realized the importance of monetary policy instruments. More and more scholars begin to study monetary policy transmission mechanism.Compared with fiscal policy, our government depends more and more on monetary policy to regulate and control macro-economy. And market segmentation has become a basic character of China's transition economy as well. So it is of both academic and practical value to study monetary policy transmission mechanism in the view of market segmentation. Its academic value mainly manifests as follows: By using tools and methods of classical theory, adding variables of transition economies and their relationships, it helps to build an economic and financial analysis framework of transition. The practical value mainly reflects in its contribution to enriching, improving and developing the monetary policy transmission mechanism theory of economic transition, which provides scientific basis for decision-making and facilitates the improvement of monetary policy effects, thereby enhances an overall effect of macroeconomic regulation and control, promoting China's healthy economic development.This article bases its research on China's specific national condition, adopts a method of combining quantitative analysis with qualitative analysis, empirical research with statistical analysis, and comparative analysis with system analysis, to study the characteristics and existing problems of China's monetary policy transmission mechanism under market segmentation. It discusses ways to break market segmentation, realize market integration, and improve monetary policy transmission efficiency, etc. The main work of the thesis includes the following chapters:1. Take time as a clue, and take the theoretical research history of monetary policy transmission mechanism as a starting point, the article summarizes and sorts the relevant theories in western countries and sums up their successful experience meanwhile analyzes the existing defaults, trying to find out an appropriate part that suits China's national condition. This article also offers an overview of the latest achievements of monetary policy transmission mechanism research by domestic scholars.2. Analyze the macroeconomic environment of monetary policy transmission. This paper discusses the current status, characteristics and problems of China's monetary policy transmission set in the features and new changes of macroeconomic structure under the financial crisis influence. It further analyzes the impact of New Basel Accord on China's monetary policy transmission in this crisis. Therefore this chapter provides a broad view for the research on the next step.3. Currently, as there is no systematic theory study of monetary policy transmission mechanism from a market segmentation view,this paper is the first to outline market segmentation connotation and characteristics in a theoretical way, and to analyze its influence on the efficiency of monetary policy transmission and the underlying economic implication.4. The paper constructs an efficiency model for monetary policy transmission mechanism, and studies the impact of market segmentation on transmission by large samples. First, it uses GRANGER causality test and multi-GARCH-BEKK model to show that: though the inter-bank interest rate and the Shanghai Composite Index returns present negative correlation , there is no evidence suggesting that the returns have any causal relationship, and the two markets show no volatility spillover effects (in Western countries it exists). Neither inter-bank market information would be quickly passed to the stock market, nor would stock market fluctuations affect inter-bank interest rates. To some extent, these two markets are relatively in a "split" state, which would impede the macro guidance and regulation function of monetary policy over capital markets. Second, by quantitative analysis, we also discover that market segmentation could cause China's stock market's violent reaction to central bank's monetary policy control, but stock market's reaction to monetary policy tools shows asymmetric effects: interest rate raising or deposit reserve ratio raising led to significantly strengthened stock market volatility, while interest rate cutting or reserve ratio cutting cause no significant volatility; the impact of interest rate markets on capital market is greater than that of the deposit reserve ratio adjustments. Those may due to the existence of serious market segmentation in China, which not only reduces effects of monetary policy transmission, but also affects effective delivery of market information, thereby affecting investors'and managers'decision.5. Introduce game theory to the study of monetary policy transmission mechanism. By constructing a four-party game model, including central bank, the public, manufacturers and commercial banks, that fits China's national condition, this paper makes an in-depth study of the dynamic process of monetary policy game under the condition of market segmentation. The results show that: monetary policy transmission efficiency is lower under market segmentation, and higher under market integration; the Central Bank of China has an innate intrinsic motivation to create inflation, but because of the existence of economic entities'rational expectations, its short-term gains will be offset by higher long-term cost.6. The change from market segmentation to market integration is a process of perfecting China's monetary policy transmission mechanism and enhancing macro-control effects. This thesis proposes the idea for the first time that benchmark interest rate functions as a bridge connecting market segmentation and market integration, and comes up with a general framework and a realization path for building benchmark interest rate system.