Research On International Monetary Policy Coordination

This paper analyses the monetary coordination between China and the US on the basis of related literature.Applying theoretical models and empirical studies,this article try to answer the following questions: What is the history and status of international monetary policy coordination? Is the potential benefit of coordinating international monetary policy important? Which factors have impeded effective coordination of international monetary policy? How to overcome these obstacles and promote effectively international monetary policy coordination?Firstly,the thesis has made a systematic review of the theoretical literature on monetary policy coordination,analyzes the history and the advantages of the two generations monetary policy coordination theory.The existing literature still does not reach a unified conclusion on the benefits of the coordination of international monetary policy.However,the theoretical models and empirical analysis in recent years are more and more inclined to prove that the benefits of coordination in international monetary policy are very significant.This is consistent with the reality of macroeconomic interdependence among all countries in the world.However,in practice,effective coordination of international monetary policy is rare,and the most successful example is when the world economy on the brink of collapses.Secondly,based on the NOEM model framework,this paper establishes a general equilibrium model of the two countries on the assumption of monopolistic competition and nominal price stickiness,and analyzes the potential benefits of international monetary policy coordination under the PCP pricing method and the LCP pricing method respectively.The model shows that the size of the benefits of monetary policy coordination depends on the the pricing method and the correlation of productivity shocks of the domestic tradables and non-tradables sectors.Under the LCP pricing mode,the relative price faced by consumers is not affected by exchange rate fluctuations,and there is no spillover effect of monetary policy.Therefore,there is no benefit of monetary policy coordination.Under the PCP pricing mode,the relative price faced by consumers changes with the fluctuation of exchange rate.The domestic monetary policy affects the foreign welfare through the export price.However,the domestic monetary authority only considers the productivity impact of its non-tradable goods.Therefore,the benefit of monetary policy coordination is significant.The specific benefits depend on the relevance of the productivity shocks in the tradable and non-tradable sectors,and the smaller the correlation,the greater the returns.After parameter calibration,it can be considered that the improvement of the coordination of monetary policy benefits is about the same as that of the independent implementation of monetary policy in various countries.Thirdly,this paper empirically analyzes the synchronicity of Sino-U.S.Economic cycle and the spillover effect of monetary policy by using SVAR model.Empirical studies show that output,price level and monetary policy in the two countries are mainly affected by their own domestic shocks,but the impact from foreign countries can't be ignored.And the U.S.influence on China is greater than China's impact on the United States.Although the reaction of the two countries to the same kind of shock is vague or even opposite,However,the paper did find evidence that the two countries' monetary policies converged: When the United States lowers the federal funds rate,China also tends to increase the money supply;similarly,when China increases the money supply,the United States also tends to lower interest rates.Finally,this article analyzes the obstacles and their solutions of the monetary policy coordination.Although both theoretical models and empirical studies show that there are significant benefits.However,the problems of free-riding and default,macro-economic uncertainty,non-economic motivation of policymakers and the problems of third countries have hindered the realization of effective coordination.Therefore,effective coordination often occurs during crises.In order to overcome the obstacles,all countries must reinforce the communication of monetary policy information,improve the design of mechanisms,strengthen the participation of developing countries,strengthen the coordination of regional monetary policies and reform governance structure of IMF and World Bank.For China and the United States,it is necessary to improve the level of crisis management and joint operations,establish a neutral assessment agency,strengthen the management of the size and structure of the current account and capital account of the two countries,and further establish a long-term coordination mechanism.