Money, Interest Rate And Asset Price

This paper constructs a medium-scale structural model of the Chinese economy. After the usual calibration and estimation, this paper evaluates the core model numerically, and uses it to forecast the key macroeconomic variables. Finally, the author analyzes the impulse response from monetary policy and expected exogenous demand shock, explores the relationship between asset price and monetary policy based on the complete model.The main contribution of this paper is building a usable, standard model for analyzing the Chinese economy. This model is rooted in the current development of New Keynesian Macroeconomics and includes numerous nominal and real frictions to make a good match of the main time series. The core CEE/SW model is the workhorse of the fourth generation macro-econometric models. Since the model specification is in accordance with other models used in the major central banks in the world, it is convenient to compare our conclusions with those in other countries. Like the complete CMR model, this paper incorporates a neoclassical bank sector and financial accelerator, which makes it convenient to analyze issues relating to money aggregates, firm credit, asset prices, and etc.Chapter 4 carefully calibrates the parameters governing the steady state based on yearly data. Then the ahe author match steady state to the main ratios, money aggregates and various interest rates in China. Preliminary analyses show that the discrepancy between model predicted and actual interest rate can be explaind by inflation risk premium, habit formation liquidity constraint, precautionary deposits and liquidity constraint.Chapter 5 estimates the dynamic parameters of the core CEE/SW model based on quarterly observations and Bayesian methods. The results show the investment adjustment cost is low, while the capital utilization rate adjustment is costly compared with extant research. Historical decomposition finds that the most important driving forces of the Chinese economy are exogenous demand (including fiscal expenditure and net export), monetary shock and investment efficiency.Chapter 6 evaluates the core model and finds the most important friction for the model performance is price stickiness, while wage stickiness, variable capital utilization, price and wage indexation are of minor importance. Removing these frictions from the model, the author compares its out-of-sample forecasts performance with VAR model and the judgemental Langruen Forecasting. The RMSE statistics show DSGE model outperforms VAR model in the long run; In case of one-step-ahead forecasts, it competes well with the judgemental Langruen Forecasts.Chapter 7 combines the core model with financial sector, and evaluates the complete model based on impulse responses from monetary policy and expected demand shock. The author proves that expected demand expansion may elevate the expectation of the agents, thus expands demand and production in the current period.Finally this paper explores the relationship between monetary policy and asset price fluctuation. Based on impulse response analysis, the author proves that financial shocks contribute to business cycle fluctuations, financial structure plays an important role in the propagation of monetary shocks, and different monetary rules may influence the propagation of financial shocks. The simulation results support introducing inflation and asset price targeting into money growth rule, which may reduce macroeconomic fluctuation. While targeting output gap may reduce output and asset price fluctuations, at the same time amplify the inflation fluctuation.