Monetary Policy Instuments Selection In China

Unlike monetary policy practice of the mature market economy, the current formulation and implementation of monetary policy in China is still in the process of interest rate liberalization, with selection and effects of policy instruments having a deep transformation mark. Given the existing literature focusing less on the impact on the use of monetary policy instruments of interest rate liberalization within the monetary policy framework, this article study the effects of selection mechanism and the conduction of monetary policy tools from two aspects of the process and the node about interest rates liberation, to deepen the understanding of monetary policy and to provide a useful reference for improving the effectiveness choice of policy instruments.In the process of marketization of interest rates,the paper mainly borne from the perspective of the history of monetary policy tools, macro-perspective of monetary policy operating procedures and microscopic perspective of firm risk taking to analyze microscopic perspective. Firstly, this paper systematical reviews the development and evolution of the general monetary policy tools and particularity of monetary policy instruments in the process of interest rate liberalization from a historical perspective, and found that in the practice of China’s policy instruments, not the more market-oriented monetary policy tool is move effective tools, only monetary policy tools to adapt to China’s national conditions is more dynamic, and plays an more important role in the regulation of China’s monetary policy; while not the monetary policy instruments played an active role are more likely to become mainstream tools in the coming monetary policy framework, the more market-oriented monetary policy tools become more effective and to play an increasingly active role in the regulation of China’s monetary policy, at the stage of interest rate liberation continuing to deepen and finalize the transition.The third part of this paper follows the path of macro monetary policy operating procedures, uses regression analysis and impulse response analysis of a Markov regime-switching vector auto-regression model of two sub-paths "intermediate target-the ultimate goal" and " operational objectives - intermediate targets", identifies reversely narrow money supply is an effective intermediate target to adjust both inflation and output volatility; interest rate for money market operations is an effective monetary policy operational objectives to narrow money supply;combination of these two points , the optimal path of monetary policy tools can be described as that the monetary authority uses monetary policy tools closely related to interest rate for money market operations, to achieve the ultimate goal of price stability and good economic performance. This optimal operating path of monetary policy shows that price-type tools are superior to quantitative tools in the aspect of internal transmission, quantitative tools are superior to price-type tools in the aspect of external conduction on the contrary. This is closely related to the two-track feature of interest rates, and along with the deepening of interest rates liberalization, as the rolling regression analysis of this paper shows, the external conduction has a significant changes after 2009 and the price-type instruments has an increasingly significant control effect. The regression analysis also showed that the mismatch of currency credit resources caused by the dual-track interest rates is an important reason for the unconventional relationship, appearing China’s current monetary policy operating procedures, between broad money supply and inflation, broad money supply and output growth, and also between credit and output growth.The fourth part of this paper investigates the transmission effect of macro monetary policy stance influence micro enterprise risk taking. This part firstly sort out the mechanism between monetary policy stance and enterprise risk taking during interest rate channel, the credit channel and the expected guiding channel, and the structural differences on the level of the industry and enterprise, followed by a combination of listed companies in Shanghai and Shenzhen A-share data Empirical experience, comes to the conclusion that monetary policy stance play a significant role to activate the vitality of micro enterprise, avoid enterprise excessive risk taking in order to achieve the goal of "steady and better" economy. Specifically, enterprise risk taking will decrease significantly while monetary policy stance steers to tighten,and it is the case as to tightening quantitative or price-type tools; when monetary policy tightens, the falls of enterprise risk taking mainly exposures in the non-state-owned enterprises, SMEs and durable goods manufacturers; industry heterogeneity leads that directions and extents of inter-industry enterprise risk taking declines varies in the face of tight monetary policy, concretely, the IT, Wholesale &Retail and Communication & Cultural industry’ risk taking has the most fall, the Farming, Forestry, Animal Husbandry & Fishery, Manufacturing, Construction,Transportation & Warehousing industry, Real Estate and Social Service industry’s decreases less,while the Mining industry and the Electricity, Gas &Water production and supply industry’s performance "accident",would rise; on average the third industry’s risk taking declines most, the primary industry’s follows and the third industry’s minimum,while it is of concern that durable goods of manufacturing industries and some producer services has a significant reduction.The fourth part of this paper builds a DSGE model adding preventive savings function, uses the Bayesian estimation methods and investigates how the different structure of the interest rate decisions affect the optimal choice of the monetary policy instruments. The result shows that two-track interest rates and interest rates made by market need the different optimal policy instruments, specifically, in the time of dual-track interest rates ( deposit rates control), credit line and window-guiding has a better fine tuning and a longer durable effect, the adjustment from leverage ratio and the conventional policy instruments of deposit reserve ratio causes the comparatively large macroeconomic variable changes, therein, compared to the interest rate rule,credit line rule and other monetary policy tools, the RRR causes the most significant fluctuations of economic variables such as inflation and real output and the leverage ratio adjustment causes stagflation risks coexisted decline in output and inflation; in the period of interest rates made by market, quantitative tools such as credit line rule and RRR can’t bring the same effect like that in the period of dual-track interest rates,the benchmark interest rate following the Taylor rule can achieve the regulation purpose but also be compliance with the principle of prudence from the view of influence degree; in short, price-type instruments are better during the period of interest rate made by market and quantitative instruments perform better in the dual-track interest rates.At the same time simulation based on China’s current economic structure also shows that the macroeconomic effects of deposit reserve rate and benchmark interest rates exhibit non- cointegration and the rise of inhibited deposit rate can weaken inflationary pressures and promote economic growth. In addition, the positive shock from the deposit operating costs,the loan administration costs and excess reserves management costs has different impacts during the different interest rates decision structure. Overall, the fluctuations in economics variable is less during the period of dual-track interest rate than the interest rates made by market, and the real output caused by these three costs shock decline when interest rate determined by the market.Based on the foregoing finding of the theoretical analysis and empirical research,this paper presents relevant policy recommendations on how to continue to promote the interest rate market building about the various monetary policy tools, how to improve monetary policy instruments operating framework and promote its transformation and how to improve monetary policy management about risk level.