Effectiveness Of China's Monetary Policy In Response To Fluctuations In The Economic Cycle Under Open Conditions

Business cycle is a traditional of economics. The study of business cycle varies with the cycle itself changes. Monetary policy is one of the most important macroeconomic policies for the modern economy. It is one of the economic focuses in the civilized world that whether the monetary policy has an effect on the business cycle or not.Firstly, with analytic techniques of the latitudinal and the longitudinal comparisons, this paper analyses the theories home and abroad concerning business cycle and the efficiency of monetary policy coping with it. Taking the conclusions as another start point and a foundation for further studies, this paper divides sections of business cycle with different filtering analytic in the time frame from reform and opening up till 2009. It also studies the business cycle's five features including volatility, co-movement, durability, asymmetry and duration dependence in great depth. After a general description of China's business cycle in an open condition, this paper digs deeply into the causes of the business cycle and the transmission mechanism in the aspects of external shock and internal unbalance. The results demonstrate, in the open environment, the external shock has gradually become a vital cause for China's business cycle. Meanwhile, the internal unbalance aroused by consumption and investment change is still a major reason for China's business cycle. In addition, the empirical research on the transmission mechanism of China's business cycle in an open economy further explains the main reason why the macro-policy mainly expands investment and stimulates export to deal with the business cycles.For further Chinese monetary policy efficiency analysis, fully and thoroughly understanding of China's business cycle in an open economy is necessary.China's real monetary policy has just formed since 1984 when People's Bank of China exclusively exercised the central bank functions. China's monetary policy itself develops gradually, so it is essential to induce and analyze the framework and the historical practices of the monetary policy coping with business cycle. On the basis of it, this paper conducts an empirical analysis on China's business cycle in an open condition handling business cycle with two methods of co-integration analysis and error modification model. The analysis illustrates that China's monetary policy is generally effective dealing with economic fluctuations. There are, however, some drawbacks in China's monetary policy due to some institutional and technological barriers. Therefore, on the basis of such analysis, this paper further studies the main barriers that restrict the effectiveness of China's monetary policy from two aspects such as foreign exchange administrative system and the monetary policy transmission mechanism. In the meantime, this paper also discusses several challenges such as reform of RMB foreign exchange rate, asset price fluctuations, RMB internationalization and reform of international financial system aroused by the deep going globalization of China's economy.Last but not least, this paper raises some appropriate proposals concerning institutional frameworks, market conditions, technological objectives and operational matters in order to meet new challenges in an open economy and construct effective monetary policy system.