Research On The Monetary Stabilization Policy

Based on common economy theories, the impact of the aggregate supply and demand always affects a country's economy stability. To avoid the welfare loss caused by unemployment, inflation and other economic indicators'fluctuation, it is well acknowledged, in theory, that the policy makers should utilize the macro-economic policies, such as monetary policy and fiscal policy, to smooth the cyclical effect of the economic cycle. Since Hume, the debate of whether the change of monetary supply is neutral has already started; however, in the overall views, it is agreed that the change of monetary supply has some impact on the macro-economy in the short run, which lays the foundation of utilizing monetary policy to smooth the economy cycle.While the author examining the development of macro-economy since the reform and open-up of the China, the total problem, the structural problem and the institutional issues continue existing. The aggregate output and inflation rate greatly and cyclically fluctuated, which depicts the curve with frequent peaks and troughs. In the whole, China's economy is more stable than most developing countries; however, the frequent macro-economy's"up and down"has certain negative effects on the economy growth. The author also found that the monetary policy might not help to stabilize the economy cycle as expected. Since 1977, there are five major economy cycles that lies between 1977 and 1981, 1982 and 1986, 1987 and 1990, 1991 and 2001, 2002 and by now. In the first four cycles, the first three turned out to be"hard landings"due to the counter-cyclical policies; only the fourth resulted in"soft landing". In the latest cycle beginning in 2002, although the historic"moderately stable high growth"appeared between 2003 and 2005, the macro-economy situation greatly changed after 2005, which made the central bank, that is, the People's Bank of China, utilize the tight monetary policy instruments, such as window guidance, raising and differentiating required deposit reserve ratio, collecting the liquidity through open market operations and raising the saving and lending interest rates, to weaken the expectations of the overheat and to avoid the high inflation and the systematic risk of the financial system. Based on the first quarter macro-economy data of 2008, the overheat trend did not change with the implementation of tight monetary policy. As people suspecting and even criticizing the policy's effectiveness, the overwhelming global financial crisis led the global economy to a recession, which greatly influenced the economy growth of China. The pressure of the economy's stable growth has greatly increased with the contraction of foreign demands, the over-supply of certain export-oriented industries and the rising number of unemployed people. As the economy's growth rate slows down, the suspicion of the monetary policy changes dramatically from the original ineffectiveness to later excessiveness. The studies even question the effectiveness of macro-economy theory and the judgment of the macro economy's situation made by major economist in China.In fact, there are two important questions about the stabilization effect of Chinese monetary policy: the first is if the economic growth driven discretionary monetary policy is appropriate. After thirty years of rapid development, China has grown to the third largest economic body. There has always been a dispute about whether monetary policy objective should change from economic growth driven to economic stabilization driven. In other words, if Chinese monetary policy targets to inflation, as many other countries do, will be more reasonable and effective? There are two arguments will prove"the inflation-targeting is inapposite to the present stage of China": first, as many scholars said, our country does not possess good condition for implementation. For example, price stabilization can't be the first objective of monetary policy in a short term, the central bank's instruments are not totally independent, the bad accuracy of inflation forecast, etc; second, definite or implied inflation-targeting may cause high output volatility and ignore other targets(economic growth, for example). So, the upper debates lead to the second question: if Chinese monetary policy is not improper, or says China can't adapt stabilization driven monetary policy at present stage, then, what is the solution to the problem of the stabilization effect of Chinese monetary policy? Theoretically, prove behavioristic monetary policy has its rationality in some extent. Find the certain problem or restrictive factors which exist in the period of stabilization and influence the effect of stabilization. Those are just what will discussing and solving in this article.Except for introduction, this article has seven chapters, main contents include: The chapter 1 and 2, introduces the theoretical foundations and analysis methods of the monetary policy stabilization effect from different viewpoints.The chapter 1, surrounds"the revolution and the transformation". Starts with the general framework of business cycle analysis, then gives a detailed description of the relation and difference between the self-maintenance cycle model and impact-conduction model, further discusses the welfare cost exists in the impact-conduction process, leads to the necessity of the stabilization effect of monetary policy. On these bases, further analyses the monetary effects in"equilibrium"and"disequilibrium"business cycle theories, points out that monetary policy has the stabilization effect only in the"disequilibrium"business cycle model.The chapter 2, bases on the AS-AD model, along with the IS-LM model's development procedures, summarizes different theory schools'analysis and expansion on the IS-LM model. On these basis, further analysis the stabilization mechanism of monetary policy in different theories, depicts the stabilization policy's development procedure from well accepted to discarded, from reconsidering to renaissance; proves the feasibility of the stabilization effect of monetary policy.Three chapters below respectively analyze three critical problem for monetary stabilization policy process : goal, transmission mechanism and effects, which attempt to a complete construct monetary stabilization policy framework.Chapter three illustrates inflation welfare costs and disinflation output loss on the basis of cost-benefit analysis and argues that the center banks face goal tradeoff dilemma in conducting monetary stabilization policy. It analyzes level tradeoff and volatility tradeoff between inflation and output, further advocates that optimal monetary stabilization policy goal is to minimize the sum of output and inflation volatility.The velocity, magnitude and effects should be accurately evaluated and precisely controlled in that policy variables variation be transmitted into the economy in conduct of monetary stabilization policy. Thus, friction is very important for study of monetary transmission mechanism influences and effects of conduct of monetary stabilization policy. Based on the viewpoints, Chapter four analyses transmission effects of two important monetary transmission channels, interest rate channel and credit channel. It argues that monetary stabilization policy effect is to some extent weakened or enlarged as a result of incomplete interest rate transmission effects and financial accelerator effects for incomplete credit market and increases uncertainty of stabilizing economy for the central banks in conducting monetary policy.Chapter 5 mainly devotes to the effects analysis. On the basis of having analyzes the main methods and empirical evidence of the monetary policy stabilized effect, the dissertation introduces the expectation factor, points out expectation is of critical influence to the monetary policy stabilized effect and finally analyzes the asymmetric effect.With the deepening of the economic and financial globalization process, the free floating degree of goods, capital and labor crossing countries is getting higher and higher and the issue of monetary policy stabilized function mechanism is becoming more and more complicated. Based upon this view, chapter 6 introduces the opening factor in the economy. This chapter analyzes the monetary policy paradigm under the open economy and the stabilized target trade-off and the exchange rate transmission mechanism. It not only shows the monetary policy stabilized function mechanism is getting more and more complicated, but also provides a satisfactory evaluation platform for China's monetary policy stabilized function mechanism so as to make the stabilized function mechanism more perfect and close to the real world.All in all, we can see clearly the basic frame of the monetary policy stabilized function mechanism. Using it as an analysis frame, the dissertation employs the policy simulation and control method in the dynamic stochastic general equilibrium model, makes quantitative evaluation on China's current monetary policy stabilized effect function mechanism. On the basis of all these researches, the author provides suggestions for the current choice of the most optimum monetary policy and then makes predictions in its future development.The main contribution and innovation of this paper performs in the following three aspects:First, breaks through the traditional research framework of monetary policy mechanism, highlights the realistic issue of stabilization, and establishes an open, sustainable and analytical framework for theoretical and empirical research. In the study, through the full possession of foreign literature, such issues as have been introduced mechanism of monetary policy in mainstream textbooks: the dilemma of inflation - output trade-off in the target of monetary stabilization policy; due to the presence of friction factors, the stabilization being weakened or enlarged during the monetary policy transmission process; influences by expects in the currency stabilization policy, as well as the effects of globalization on the stabilization effect, all above has built a basic analysis framework based on stabilization of monetary policy, which is not only an expansion of the traditional mechanism of monetary policy, but also provides theoretical basis an objective for scientific evaluation of the monetary stabilization policy.Second, deconstructs the process of monetary policy stabilization, through analysis on the target -transmission– effect, acquaints important points about the effectiveness of stabilization policies such as: (1) the optimal objective of monetary policy stabilization is to minimize the output - inflation volability; (2) the viscous transfer of rates and financial accelerator effects in varying degrees, weaken and enlarge the impact of the policy transfer effects; (3) referring to the effects of monetary stabilization policy, the first to consider what category the effects of monetary policy is, whether the systematic or non-systematic monetary policy, or it is the monetary policy to be expected or not is expected, all put important impacts on output.Third, based on the expansion of the four equation of New Keynesian model, puts quantify evaluation on the effect for mechanism of the monetary stabilization policy of China, attempts to make the choice of optimal monetary policy at this stage.