Asymmetric Effects Of Monetary Policy In China

In the practice of Chinese and foreign monetary policy, it has been found that there is a big difference between the effect on the real economy of expansionary monetary policy and that of tight monetary policy with the same intensity. The asymmetric effect influences the outcome of monetary policy regulation on the economy and brings difficulties in accurate formulation of monetary policy to the monetary authorities. It thus attracts scholars to have in-depth discussions and researches.In this paper, on the basis of previous researches, I analyze and empirically test the formation mechanism of the asymmetric effect of monetary policy from the perspective of bank lending channel which directs to the practice of China’s monetary policy, and give recommendations on improving the effectiveness of monetary policy in China at the end.Firstly, I summarize the researches on bank lending channel and asymmetric monetary effect and introduce representative theories of the formation mechanism of the asymmetric effect, so as to give readers a basic knowledge about this field.Then, through the review of China’s monetary policy practice, I find out three important factors influencing and constraining the practice:credit rationing, capital adequacy requirement, and exchange rate arrangements and exchange settlement requirement. After analyzing the preconditions of bank lending channel and giving empirical test, it testifies the existence and the important position of the bank lending channel in China’s monetary policy transmission, providing a reasonable basis for the subsequent analysis of the asymmetric effect of monetary policy in China from the bank lending channel.In the analysis of the formation mechanism of the asymmetric effect of monetary policy from the perspective of the bank lending channel, I first implant the main factors of the monetary policy practice-credit rationing and capital constraints, into the loan supply equation of the CC-LM model, the baseline model of analyzing the bank lending channel. When the economy is in boom times, the credit rationing constraint and capital constraints are in loose binding, while when the economy is in the depression, the credit rationing constraint and capital constraints are in tight binding. Thus, contractary monetary policy can affect the the CC curve which reflects the loan supply of commercial banks, while expansionary monetary policy can not affect the CC curve. Thereby, the asymmetric effect of monetary policy is generated in the framework of the CC-LM model.In order to further analyze the impact of the exchange rate on the asymmetric effect of monetary policy, I construct the CC-LM-BP model, an open economy model, on the basis of the CC-LM model. It is found that the asymmetric effect of monetary policy is amplified after taking into account the exchange rate by introducing credit rationing constraints and capital constraints into the model. Further analysis even shows that the fixed exchange rate arrangements generate stronger asymmetric effect than the floating exchange rate arrangements. The reason behind is that in the fixed exchange rate arrangements, the central bank has to intervene in the foreign exchange market to maintain exchange rate stability, and thus passively zoom money supply. In this process, credit rationing constraints and capital constraints asymmetrically affect the loan supply of commercial banks again.With the use of smooth transition regression (STR) model, I have examined the asymmetric effect of monetary policy. The findings verify the existence of asymmetric monetary effect in China, i.e. contractionary monetary effect more powful on output than equivalent expansionary monetary effect, the explicability of credit rationing for the forming of the asymmetric effect, and the amplification of the exchange rate on the asymmetric effect. Thus, the theory constructed in the previous chapter is proved.In the end, I give recommendations to improve the effectiveness of monetary policy in China, including a full consideration of the asymmetric effect in policy making, the speedup of the construction of money market and capital market to lossen credit rationing, the augmentation of the capital of commercial banks to improve the effect of expansionary monetary policy, the broadening of the fluctruation range of RMB exchange rates to trail off the amplication of fixed exchange rate on the asymmetric effect and the promotion of the marketization of interest rates to adapt to the attenuation trend of the bank lending channel in China.