The Asymmetric Effect Of Monetary Policy In China Formation Mechanism

With the financial market globalization, it is the most difficult thing faced on the central banks in the world that how to implement the appropriate monetary policy under the uncertain circumstances. Why the same monetary policy cannot attain the same effect like past? Why increasing and decreasing interest rate affect economy differently? Why are some regions more sensitive to monetary policy than the others? Economists have been trying their best so long to find the answer for the questions, and finally ascribe these phenomena to the asymmetric effects of monetary policy. Because the sensitive degree varies with the different regions, industries and firms, it's difficult for the central bank to estimate the effects of the monetary policy to macroeconomy and implement desirable monetary policy.The effectiveness of monetary policy varies with external conditions, which called as asymmetric effects of monetary policy. The asymmetric effects of monetary policy show in the following four dimensions. First, the effect of monetary policy in stagnancy is stronger than that in boom; second, the effect of developed financial area is weaker than that of finance developing financial area; third, it is more sensitive for the labor intensive industry responding to the monetary policy than the capital intensive industry; and forth, the smaller firms response more stronger to monetary policy than the larger firms. Plenty of researches have testified above phenomena, but there is short of the uniform theory framework to study the mechanism of the asymmetric effects of monetary policy.This paper constructs menu cost model and financial accelerator model in the New Keynesian framework to analyze the mechanism of the asymmetric effects of monetary policy in China. Along the clue of transmission channels of monetary policy, we construct the Dynamic Stochastic General Equilibrium Model to explain the mechanism of the asymmetric effects of monetary policy in the four dimensions within a uniform framework. Sticky price is the premise of the asymmetric effect of monetary policy, and the price transmission channel is the direct mechanism of the asymmetric effect. Moreover the financial accelerator will magnify this effect further, so the balance-sheet channel is the indirect mechanism of the asymmetric effect.We analyze the causes of sticky price by way of constructing menu cost model, then study the direct mechanism of the asymmetric effect. The main cause of the asymmetric effect is the asymmetric price transmission channel, which relates closely to the firm optimum pricing confronted with the uncertain shocks. When the uncertain money shocks come, firm will decide its output and price in equilibrium by comparing menu cost with distortion cost. If menu cost is less than distortion cost, firm will adjust its price. In contrast, firm will adjust its output, which is the cause of sticky price. Further, because of the rigidity of reducing price, firm will take on more menu cost in reducing price than increasing price. From the viewpoint of the price transmission mechanism of monetary policy, under the positive trend inflation circumstance, confronting with positive money shocks firm will adjust price more often, and adjust output more often facing on negative money shocks, which is the direct mechanism of the asymmetric effects. If we measure the effectiveness of monetary policy by its effect on output, then tight monetary policy is more effective than the easy.It is the indirect mechanism of asymmetric effects of monetary policy that capital price interacts with investment under the financial accelerator, which will magnify and accelerate the asymmetric effect. The asymmetric effect roots in the asymmetric price stickiness, and is magnified by the financial accelerator. The main cause is that the financial mechanism can magnify and accelerate the shocks of external disturbance to the whole economy system. Through the financial accelerator, money shocks would induce the external financial premium, credit scale and output fluctuating strongly. Based on the direct mechanism, the financial accelerator will magnify the asymmetric effect. At the same time, the financial friction plays a pivotal role in the indirect mechanism of the asymmetric effects. Due to the financial accelerator mechanism, there is a nonlinear relationship between financial friction and the asymmetric degrees of monetary policy. There are the positive relationships between financial leverage & external financial premium and financial friction & financial accelerator, which decide the positive relationship between financial friction and the asymmetric degrees of monetary policy. Compared with the circumstance without financial friction, the same money shock affects output stronger, so the difference in output changes caused by positive and negative monetary policy becomes larger, which is the indirect mechanism of the asymmetric effect.Financial frictions vary with the different periods, regions, industries and firms, which induce effects of financial accelerator different, and ultimately the asymmetric effects behave differently in the four aspects. In general, larger is the financial friction, the more effective the financial accelerator is, and the more remarkable the asymmetric effects. The effectiveness of monetary policy with the larger financial friction is more significant than that with the smaller financial friction. Thus, the effects of monetary policy behave asymmetrically in the four aspects because of the differences of financial frictions in the different stages of business cycle, regions, industries and firms.This paper follows the rule of practice into theory into practice strictly. First, theory comes from practice. Based on the measuring the monetary policy, we study the effect of monetary policy in China, and testify the existence of asymmetric effect in 3^rd chapter. Second, only relying on the abstract model, can we know the essence hiding in the economy phenomena and find the potential laws. In the 4^th and 5^th chapters, we study the mechanism of asymmetric effects by analyzing the micro-behaviors of market participants, and use the dynamic stochastic general equilibrium model to study the roles of the direct and indirect mechanisms of the asymmetric effects, finally simulate the price and financial accelerator transmission mechanism in policy economy experiments. Third, practice is the sole criterion for testing truth. In the 6^th and 7^th chapters, we compare the empirical results with the simulation results, and testify the applicability of the theory models based on the data of regions and industries in China. Finally, the theory will come back to practice and formulate the policies to guide the practice. The 8^th chapter sums up the main conclusions in this paper and gives the policy implications.Following the financial frictions, this paper firstly study the price transmission mechanism of the asymmetric effects; then introduces the dual-functions of capital goods, price rigidity mechanism, the lagged investment and Costly State Verification into BGG model to analyze the asymmetric effects from the balance sheet channel. Based on understanding the formulating and magnifying mechanism distinctly, the central bank should adjust the monetary policy according to the different stages of economy development and business cycle, and implement protection and pressure monetary policy. Meanwhile, the central bank should exert the structural monetary policy and implement different monetary policy according to circumstances.