Research On Linkage Mechanism Between Monetary Policy And Fiscal Rule Under The Framework Of DSGE

Fiscal policy and monetary policy have been considered as two important tools of governing market economy, they play a vital role in regulating and controlling macroeconomic in each country. However, whether fiscal policy and monetary policy has anticipated effects, not only depends on whether fiscal policy and monetary policy are correctly developed and implemented, but also depends on whether they can be effectively cooperated between each other. How to place proper position in the fiscal policy and monetary macroeconomic control, and how to coordinate the two main policy to play their own functions and achieve the best results and play fully their positive effects on the national economy. They both have great significance to research theory and pratically.On the other hand, Since the "rational expectations" revolution, Dynamic Stochastic General Equilibrium (DSGE) models have gradually became a powerful instrument of analyzing macroeconomic policy. They have solid microeconomic basis, and have incorporated the ideas of general equilibrium, which can effectively decomposition and compare the effect of exogenous shocks (e.g. fiscal policy shock, monetary policy shock) to economic fluctuations, and can conveniently study fiscal policy and monetary policy transmission channels. Meanwhile, DSGE is completely structured model, which can be effectively used for the counterfactual simulating (e.g. comparing different fiscal policy and monetary policy). Thus, DSGE model has become an important tool for an empirical study on macroeconomic policy.Based on the above two reasons, this dissertation incorporate the linkage mechanism between fiscal policy and monetary policy under framework of DSGE model to investigate how the interaction of the two main policy affect our country’s macroeconomic fluctuations. Therefore, firstly, this dissertation reviews the relevant literature and has a brief introduction about DSGE models’theoretical frameworks, solving methods and parameter estimation. Then it is followed by empirical study, which is divided into two big blocks. One block is based on DSGE model of labor market clearing to analyze the interaction mechanism between fiscal policy and monetary policy how to affect output, consumption, inflation and investment fluctuations in China. The other consider labor market frictions, which based on search-match labor market model to analyze the linkage mechanism between fiscal policy and monetary policy how to affect employment in China.We can draw the following conclusions:(1)In the case of the labor market clearing, the interaction mechanism between monetary policy and fiscal rule has asymmetric effects. i.e. when a standard deviation of fiscal policy shock happens, the endogenous response of monetary supply to fiscal shock has no obvious effects on fiscal policy’s implement. whereas, when a standard deviation of monetary policy shock occurs, the endogenous response of fiscal rule to monetary supply shock has a significant effect on monetary policy’s implement. Moreover, the linkage mechanism between the two main policys can improve policy balance between output and inflation stability and help to alleviate macroeconomic fluctuations.(2) In the case of friction in the labor market, the coefficients of charactering the interaction mechanism between monetary policy and fiscal rule can significantly change the impact on monetary policy and fiscal rule to labor market. So when policy-makers formulate policies, it is necessary to reasonably chose policy parameters and effectively match fiscal rule and monetary policy.The most innovations and contributions as follows in this dissertation:when setting policy equation, we suppose that fiscal rule’s tool variables passively react to monetary shocks, meanwhile, monetary policy’s tool variables also passively react to fiscal shocks. It reflect the characteristics of the linkage mechanism between fiscal rule and monetary. Under the framework, this paper has a comprehensive analysis of how the interaction mechanism between the two major policys influence macroeconomic. Additionally, this article incorporates search and match model into DSGE model to investigate the interaction between monetary policy and fiscal rule how to influence employment for the fist time.