The Study On Differentiated Monetary Policy With Coordinated Regional Economic Development Perspective

Developing divergence across areas is an important feature in China’s growth, and howto promote harmonic growth is a key issue in the economic task. With the social marketeconomy construction, the role of finance in the economic growth is more and more important,and the effects of monetary policy emerge during that process. Although traditionally, both inChina and other countries, the policies of promoting less developed areas growth are mainlyfiscal policy (e.g., central budget transfer), tax policy, industry policy and regionaldevelopment strategies. As one of the most important macro economic policy, monetarypolicy is of whole effect policy. While, as the differences of areas, monetary transmission isquite different across areas, which counter the effects of monetary policy, and is harmful tothe regional economy. So, to study the differential monetary policy under the regionalharmonic development is an important and meaningful issue. Based on the objective facts ofregional different development stage, we will demonstrate the mechanism of financialdifferent effects across regions; explore the necessity, probability and sufficiency of the roleof differential monetary policy in promoting regional harmonic development.Chapter1introduces the background, topic selection and objectives of the research. First,we show the historical facts of regional differences as well as the status quo. After the briefretrospect of transformation from agriculture to industrial economy, we draw the conclusionthat the industrial efforts beginning at the mid1800s deepened the regional difference. Withthe new China, we pass through the planned economy, the first stage of reform and opennessafter1978and the period of new century. How to promote regional, esp. the less developedareas growth, is a big issue to the policy maker. And the research is quite meaningful andpractical. So, based on the objective facts of regional different development stage, to study theregional monetary policy and financial development differences, marrying the study ofmonetary policy and regional harmonic development, we will do our research on thedifferential monetary policy under the regional harmonic development.Chapter2reviews the literatures. The differences of regional economy developmentdetermine the difference of financial structure and financial development, which brings outthe different effects of monetary policy. So, first we review the literature of economicdevelopment, including areas capital stock estimation, production function and total factorproductivity, as well as the estimation of potential output and the relationship with inflation.To study the monetary policy transmission effects, we review the literature of monetarytransmission theory with the interest rate channel, exchange rate channel, asset portfoliochannel and credit channel. The theory is based on the whole economy, so we analysis theregional effects of the monetary transmission. Of course, the optimal currency area theory andthe practice of the new currency of Euro is one of the best examples of one monetary areawith different transmission effects. So we explore the literature of optimal currency areatheory. Chapter3we study the regional economic developmental differences and the differentialmonetary effects. Based on classical macro economy growth theory of Solow from the1950s,we study how different between different provincial economy growth and differentdevelopment stage. Only with clear recognize of regional economic growth, can we do bestresearch on the differential monetary policy. As a big economy, the cyclical economy isdifferent across areas, and most macro economic managements are based on developed areas,which is harmful to the less developed areas. So, it is urgent to study the differential monetaryeconomy and the policy adjustments. With more reliable statistics and methods, we estimatethe data of the capital stock of the base year, investment flow, capital stock deflator, anddepreciation. Then we estimate the provincial capital stock with the perceptual inventorymethod and find out that the growth of capital stock is closely related with the economicgrowth and the ratio of capital stock and output is negatively related with the economicgrowth, which is consistent with economic theory and other researcher’s findings. The resultsalso demonstrate that our estimation is accurate and credible, which are good foundations forfurther economic research.With more reliable statistics and methods, we estimate the total factor productivity (TFP)from1990-2008. The Results show that the capital edacities are a little higher than matureeconomies and are negatively related with economic growth, which means the growth modelis still of extensive pattern, not of the intensive model. The TFP is closely related to economicgrowth, the advanced areas with high TFP, and the lagged areas with low TFP, which canexplain the divergence between areas. Then, the policy implications is to enhance the publiceducation and technology inputs in the middle and western areas, encourage the tech-transferfrom east to west, then promote the harmony growth in China.Based on the outcomes of the last two parts, we can get the data of provincial total factorproductivity and estimate the provincial output and output gap from1990to2008. We findout that there is close relationship between output gap and inflation as well as the economicgrowth, which provide us the theoretical foundation of differential monetary policy promotingharmonic economic growth.Chapter4analyzes the optimal currency theory and the fitness of China’s optimalcurrency area and concerns the regional effects of monetary policy transmission with vectorauto regression method. We investigate the criteria of optimal currency area with theindicators such as economic and financial development, economic openness, anddiversifications of production and coherence of inflation as well as the compound standards.After comparisons, we find out that China is still not an optimal currency area. Also, wecompare China with Euro area and find out the difference within China is much larger thanEuro areas, which means that it is necessary to implement differential monetary policiesacross areas. After that, with the provincial sample and VAR model, we analyze the shockeffects of monetary policy to the price, economic growth and deposits across different areas.We find out that there are obvious regional effects of monetary effects to different areas in theprice, growth and deposits, and the developed rich areas, such as coast east provinces aremore sensitive compared with the middle and west areas. We also explore the movements of money market funds and then show the regional effects of monetary transmission effectsacross countries.Chapter5tells the story of practices of differential monetary policy promoting harmonicregional development. First we explore the traditional monetary policy, such as interest rates,re-loans and reserve policy. We point out the shortcomings of the interventions policies in theplanned period and analyze the positive effects and practices during recent decades. Then wedo cases study of differential monetary policies. With the strategies of promoting harmonicdevelopments across less developed areas, such as west development strategy, North Eastrevived strategy, border area development strategy, we introduce the background of thestrategies above and analyze in detail the cases of financial develop policies and the effects ofdifferential financial policies and economic growth.The last chapter concludes the whole study and gives specific policy suggestions.Because of the regional imbalances in economic growth, the unite monetary policy must haveunique effects across different areas, so it is necessary to maintain differential policyimplementation with in the monetary framework and then promote the effectiveness ofmonetary policy, enhance the harmonic development. So, we should do better job on themonetary objectives, credit policy, interest policy, differential reserve policy and re-loanspolicies, and give better policy helps to the less developed areas, explore better policyimplementations, and make sure the better effects of monetary policy in the progress ofharmonic regional developments.