Theoretical And Empirical Studies Of The Effectiveness Of Monetary Policy Of China

The effectiveness of monetary policy has been a long-standing question in the monetary economics literature. In China, the concern and discussion about this issue started from Asian Financial Crisis. During that period, China suffered the deflation. The monetary policy implemented by the central bank was blamed for the failure to stimulate the economic growth, improve the domestic demand and increase the employment. From then on, the economics circle got started to question the effectiveness of monetary policy. How to evaluate the effectiveness of monetary policy? Is the monetary policy really ineffective? With this question, the author stared the review of monetary economics literature, and then I found both the classic monetary theory and the new rule , they are reaching the agreement on the fact that monetary is neutral in the long run while not in the short run, which indicates the point of view of Friedman is correct and timeless. In other words the monetary can only affect the price level in the long run instead of the real economy. If we recognize this conclusion, we would realize that the blame on the monetary policy results from the "overloaded" function of monetary policy, we neglected the boundary of the monetary policy. We tent to rely on the monetary policy to solve all the problems, even including the fiscal issue and other social issues. But we have to make it clear that monetary policy is not the remedy to all the issues, it might only affect the price level and economic growth. Furthermore, in the area of monetary policy, the two indexes of inflation rate and GDP growth are the measures of final objective of monetary policy. In China's case, according to the law of People's Republic of China on the People's Bank, the final objective of China's monetary policy is to improve the economic growth on the basis of the stability of RMB currency value. Therefore, the author decided to analyze the effectiveness of monetary policy from the perspective of the final objective.The study in this paper comes to the following conclusion:1. The definitive implication of the long run stability of the final objective is neither zero inflation rate nor the fluctuation around the zero inflation rate, instead it means the inflation should be controlled in the comfort area. In terms of the implication of economic growth, owing to the difficulty in calculating the potential economic growth, the possible way is to decide the level of growth on the basis of the stability of currency value.2. This paper applies GDP Deflator to substitute the CPI to measure inflation, and based on the data 1983-2006, we examine the comfort area of ideal inflation rate and economic growth rate are respectively 1-6% and 7-10%.3. The comparison between the real inflation rate and economic growth rate and their ideal ones indicates the monetary policy has been functioning well since 2001. Then the regression analysis helps us to identify the effectiveness of the monetary instruments. The result of regression analysis figure out the Ml is the most influential variables to the GDP growth rate, while in the case of inflation rate; Deposit rate is the most effective determinants, which evidences that market oriented reform of interest rate contribute the effectiveness of monetary policy in recent years.4. If it was recognized the final objective of China's monetary policy is the long run stability of currency value, the implementation of inflation targeting would be a feasible choice. So we need to create conditions for its realization in the near future.