Research On Monetary Policy Decision Based On Finacial Condition Index

The 1997 Asian Financial Crisis and the 2008 U.S.Subprime Crisis have a tremendous impact on the financial system,economic growth and social stability.The ability to achieve economic recovery,growth and stability and the ability to resolve a seires of problems triggered by the crisis are closely related to whether the monetary policy decision is scientificly and effectively made.How effective is China's monetary policy?Whether the monetary policy objectives are reasonable?Are operating tools appropriately selected?Are implementation ways inclined to be regularization or discretion?This series of problems are in urgent need to be solved in the process of making monetary policy decisions.As an indicator of financial conditions,since its publication,FCI has been accepted and applied to monetary policy operations in many countries.To study the monetary policy-making based on FCI will increase the options of monetary policy-making tools,provide a new thinking direction for China's monetary policy decisions,and improve the effectiveness of monitoring the implementation of monetary policy and the operation condition of the financial system and the macro economy;meanwhile,this study will contribute to the development of finance and statistics-related theories.Basing on FCI's connotation and transmission mechanism in the monetary policy,this paper hereby builds an FCI system,verifies its association with monetary policy,and analyzes the effect of monetary policy decisions from both static and dynamic aspects.Meanwhile,this paper employs FCI to study the objectives,tools and rules of the monetary policy operation,research,simulates monetary policies and does a forward-looking analysis of the macroeconomic situation with the help of simultaneous equation model,so as to provide new ideas and basis for China's monetary policy decision-making.The main contents include:First,elaborating the basic theories such as the connotation of monetary policy and FCI,the transmission mechanism of FCI in monetary policy and so forth;building a recognition model of monetary policy shocks based on an FCI system of different frequencies,ranges and methods of empowerment to analyze the relevance between FCI and monetary policy as well as to provide a theoretical foundation and gist for further application of FCI to monetary policy decision-making.Second,to study both static and dynamic effects of monetary policy decisions under the perspective of FCI.As for the static effect,it is undeniable of the short-term substitution relation between the output gap of the total supply and the inflation gap,and the short term impact of monetary policy on the real output is remarkable;from the perspective of aggregate demand,it is ill-considered to estimate the effect of monetary policy only by means of the interest rate sensitivity,and further analysis is necessary to combine the financial structure and the monetary policy transmission mechanism;money demand exhibits three features of high income elasticity,low interest rate elasticity and instability,while the money multiplier in the money supply is out of the control of the central bank,and there is some endogeneity in the monetary base,so it is difficult to control the money supply.From the perspective of dynamic effects of monetary policy,a single intermediate target can hardly obtain empirical support,for its strategy must have a prerequisite of strict control and relevance;the change in statutory deposit reserve rate causes a comparatively significant impact on economic growth,and there is no long-term stable relationship with the inflation rate;the open-market operation is invalid for the promotion of economic growth,but economic growth is the basis for the central bank to choose open-market operations.Third,study the objective system of monetary policy based on FCI.Objectives of monetary policy are consistent with macroeconomic policy goals.The monetary policy system,with money supply as the intermediate target,has no significant effect in the aspect of price stability,although carries out preferably in recent years.As an intermediate target,FCI meets the requirements of relevance,testability and controllability,so it can be considered as an intermediate or operating target under the inflation targeting.In addition,because FCI is highly relevant with the ultimate goal of monetary policy,it is more forward-looking than GDP and CPI,and it can reflect the effect of monetary policy implementation and macroeconomic condition more timely and accurately,therefore,in the money supply target system,FCI can be used as a reference to the ultimate goal of monetary policy,and the central bank may consider bringing it into the system of monetary policy objectives.Fourth,to build a system dynamics model of monetary policy tools with FCI as a link.The model makes use of the causality and hierarchical relationship among monetary policy objectives to compare evaluating tools of monetary policies according to the response degree of FCI.If the central bank preferred economic growth target strongly,the statutory deposit reserve ratio should be considered as the first choice of a monetary policy tool,especially in the case of deviation between economic operation and the target,the tool is most effective;the tool of open-market operation is suitable for central bank's regular regulation,under the condition that the direction of monetary policy is unclear or the economy operates normally;when changes in market interest rates to the discount rate are relatively sensitive,the rediscount policy is the most effective tool,there are still some fluctuations in the use of tools such as the RRR,the interest rate and the rediscount rate,and the adjustment will be more frequent.The credit channel is the main channel of monetary policy transmission at the present stage,the statutory reserve of deposit has a rigid effect oncommercial banks,while rediscount is the last resort for commercial bank to resolve a shortage of funds,so it has minimal impact on the money stock.It is proper for China to adhere to the direction of monetary policy with the main objective as to stabilize prices and reduce the inflation rate,and it is valid to stick to the strategy of using a hybrid of price-based and quantity-type tools.Fifth,making a comparative analysis of monetary policy rules based on FCI.The central bank's discretionary execution is difficult to achieve desired results in the long term.Meanwhile,from the point of social welfare function and social cost function,even in the most favorable assumptions for discretionary execution,it is still the best institutional arrangement for monetary policies to follow exogenous rules.During the implementation of rules,the optimal Taylor rule is more suitable for China than full commitment and discretionary decision-making methods,and rules with FCI,which are better than other rules,provide a new reference for China's monetary policies and help further improve and enhance the effect of monetary policies.Sixth,conducting a simulation of monetary policies and a prospective analysis of the macroeconomic operation based on the simultaneous equations model.Variables in FCI is closely related with macroeconomic indexes.By adjusting and amending the assumption,more accurate analytical models are obtained for monetary policy simulation analysis and macroeconomic forecasting.Suppose the monetary authority issued currency according to the currency demand,in the next few years,China's economy would still maintain rapid growth,but it might face some outstanding issues such as high inflationary pressure,lack of aggregate demand and a high degree of export dependence.Last but not the least,presenting some policy recommendations to improve the effectiveness of monetary policies.It is necessary to adjust target system in order to improve the effectiveness of monetary policy,to adhere to the implementation of multi-target system,and to consider including FCI,as an intermediate target or reference value of the ultimate goal,into the target system of monetary policy;to innovate monetary policy regulations and improve the currency markets and related systems;to take multiple decision-making methods with implementing mixed rules as the principal,and discretion as the supplement,converting from periodic operation to the fine tune;to enhance the independence of the central bank,to prefect the mechanism of information communication and coordination,and to increase the transparency of monetary policies.