The Research On Monetary Policy Decisions Under The Perspective Of Financial Crisis

Monetary policy decision making, which lies in the core of finance, is becomingone of the key topics in the economic academia. This is largely as a result of thesignificant shocks to the national economies brought about by the global financialcrisis. Experiences from developed countries have testified the ever increasing rolethat the virtual economy is playing in modern economies, and that since virtualeconomy is a double edged sword in economic development, it must be taken into fullaccount in government decision making. Therefore, it is an important topic in thetheoretical studies of China’s monetary policy to study in-depth the monetary policyoperations and their effects of various countries around the world in previousfinancial crises and to optimize the monetary policy decision making mechanism ofChina to deal with financial crises.Based on the theoretical assumption of non neutral monetary policy and startingfrom the concept of the monetary policy decision making, this study first gives anoverview of the experiences of the monetary policy decision making of countriesaround the world in financial crises over the past100years. It then, based on theseexperiences, studies in-depth the monetary policy decision making mechanism andfoundations, and then empirically tests the validity of monetary policy decisionmaking. This study integrates the knowledge of various subjects includingmacroeconomics, financial market theory, econometrics and stati stics, etc. Overall,the dissertation follows the outline of “theoretical foundation—empiricalstudy—international comparison-policy recommendation”. It not only studies in depthand systematically the problem of monetary policy decision making in the pers pectiveof financial crisis, but also tries to put forward a whole set of useful toolkit which canoptimize China’s monetary policy operations and innovate methods to improve theeffectiveness of China’s monetary policy decision making.In summary, the major disputes in monetary policy theory lies in whether or notdecision making should be “discretionary” or “rule based”. Before1977, it seems thatdiscretionary decision making is superior to rule based decision making. However,after the concept of “dynamic inconsistency” was introduced to macroeconomicstudies,“rule based decision making” was footing on solid theoretical foundation forthe first time. There were heated discussion in the academia regarding whether central banks should implement contractionary or expansionary monetary policy to alleviatethe negative impact of financial crises and spur economic revival. In the2008globalfinancial crisis, more innovative measures appeared including quantitative easing, nontraditional monetary policy being part of it, as well as the addition of credit easingmonetary policy to the policy toolkit of central banks, which greatly enriched thetheoretical study of monetary policy decision making.So far as the timing of monetary policy decision making is conce rned, this studyintends to provide reliable foundation on timing of monetary policy decision makingusing the analytical method of empirical testing. Specifically, by constructing afinancial risk early warning model based on MS-VAR, the study measures the overallrisk of China’s financial system by integrating three indices: ComprehensiveMonetary Crisis Index, Banking Crisis Index and Asset Bubble Crisis Index. It alsomakes predictions on the timing point of monetary policy implementation to ensurethe timeliness and appropriateness of monetary policy making and implementation.Based on the empirical studies of monetary policy operation tactics of countriesin a bunch of severe economic crises happened in the past, this dissertation focuses onthe decision making mechanism of China’s monetary policy in the perspective ofeconomic crisis. By analyzing the independence characteristics and behavioralcharacteristics of the decision making body of monetary policies, the study discoveredthat enhancing the independence of central bank decision making is currently still theoverall trend of development of China’s central bank. Through the study of the toolrule and objective rule of monetary policy and exploration of decision making rulesconducive to China’s monetary policy in the perspective of financial crisis, we believethat the objective rule of inflation is a better choice for China’s future monetarypolicy rule.Regarding empirical validity tests, on one hand, the conventional monetarypolicy contributes to price stability and economic growth. Around the time financialcrises break out, the effect of monetary policies displays obvious sign of asymmetry,as contractionary effect of the monetary policy far outweigh its expansionary effect.On the other hand, the unconventional monetary policy helps to stabilize the financialmarket in financial crises. Throughout the validity tests of three kinds of innovativemonetary policy toolkits created by the Fed, the study found out that credit typemonetary policy tools like Term Auction Facility (TAF), Primary Dealer CreditFacility (PDCF) and Asset Backed Commercial Paper Money Market Mutual FundLending Facility (AMLF) display significant level of validity, while other asset purchase type of monetary policy tools do not.This dissertation also features a comparative study of monetary policy decisionmaking of representative countries in the Great Depression in the1930s, Japanesefinancial crisis in the1990s,1997Asian financial crisis and2008global financialcrisis respectively, and draw lessons from it. Also, in the wake of the global financialcrisis, this study proposes a series of policy recommendations on improving theeffectiveness of China’s monetary policy decision making, which include: enhance theindependence of China’s monetary policy decision making body, implement flexibleobjective rule of inflation, increase the transparency of the monetary policy, as well asenhance the effectiveness of the unconventional policy, etc. All these policyrecommendations are aimed at ameliorating the rule selection of China’s monetarypolicy decision making fully exerting the “Commitment Effect” of the monetarypolicy to render more independent and effective monetary policy decision making ofChina’s central bank.This study honors both theoretical and practical values. The theoreticalcontribution of this study is that it systematically defined the concept of monetarypolicy decision making for the first time, shed new light on the mechanics ofmonetary policy decision making in financial crises and established a systematictheoretical analytical framework. The practical contribution of this study is that itmade the attempt to establish a set of general models and methods of monetary policydecision making to help identify, resolve and rescue the financial crisis, and, bymeans of the simulation analysis of China’s monetary policy decision making andfinancial crisis, provide intellectual support to ameliorate the tactics of China’smonetary policy operations.