Research On The Regional Effects Of Monetary Policy In China

The regional effect is an important practical problem for the implementation of monetary policy.On the one hand,it may have a negative impact on coordinated regional development;on the other hand,it may affect the aggregate effect of monetary policy.A test and analysis of the regional effect of monetary policy and its determinants is of great significance in many terms such as deepening the understanding of and facilitating the transmission of monetary policy,accurately evaluating and improving its efficiency,as well as eliminating the regional dispersion in economic growth for a harmonious development.Current studies have investigated relatively comprehensively and elaborately the regional effect of monetary policy in China.These studies have provided many meaningful conclusions,which are useful references for the understanding of monetary policy transmission mechanism and its regional effect.However,it has to be noticed that for whatever economic phenomenon,the characteristics and determinants are by no means static.A thorough review of the above studies shows that there is still some room for improvement with respect to the investigation on the regional effect of monetary policy in China.In terms of research methods,the current studies fail to take into account simultaneously the independence of regional economies,the spillover effect among regional economies and the aggregating attribute of monetary policy.Specifically speaking,most of these studies have adopted the method of building independent VAR models for each region.It fails,on the one hand,to properly deal with the relationship between monetary policy,the regional economy and national economy to accurately describe the adjustment process of monetary policy,and on the other hand,to allow for interaction among regional economies to take into account the spillover effect which will have an impact on the transmission of monetary policy.In terms of research perspective,the current studies fail to take into account the influence of evolving institutional background such as interest rate liberalization and the transformation of the monetary policy framework.Specifically speaking,these studies have focused mainly on the previous monetary policy framework which is quantity-based.However,under the new situation of increased interest rate marketization and the gradual transformation of the monetary policy framework into a price-based one,the transmission mechanism of monetary policy will undergo important changes.As a result,the determinants of the regional effect of monetary policy may also undergo important changes.In view of the above limitations,this paper reexamines the regional effect of monetary policy in China.Specifically,the paper begins with an analysis and comparison of the ultimate effect of monetary policy on regional economies by means of an analytical framework that can take into account simultaneously the independence of regional economies,the spillover effect among regional economies and the aggregating attribute of monetary policy.After that,the paper,in the current context of interest rate liberalization and the transformation of the monetary policy framework from a quantity-based one to a price-based one,further makes an in-depth analysis of the regional effect of monetary policy in China and its determinants,with a special focus on the interest rate channel.In particular,the paper will cover the following contents.Firstly,the paper describes and evaluates the regional effect of monetary policy in China from an overall perspective,which provides the intuition for understanding the phenomenon and the origin for further deduction.Specifically,in Chapter 3,by using quarterly data from 1996Q1 to 2015Q4 for China's 30 provinces and building an MCSGVAR model,the paper analyzes and compares the dynamic impact of monetary policy shocks on economic activities in different regions.In contrast to current studies,this study uses quarterly series of real gross regional product for each province rather than its annual series or other monthly series such as industrial added value,which can more comprehensively and sensitively reflect the impact of monetary policy on regional economies;takes into account the spillover effect among regional economies with the help of GVAR method,where the "link matrix" is constructed from inter-provincial trade data rather than the spatial distance between provincial capitals,which can more directly reflects the interaction among regional economic activities;takes national economy as the basis for the formulation of monetary policy by introducing a central bank unit into the GVAR model and forming an MCSGVAR model,which gives a more realistic description of the adjustment process of monetary policy;employs SGIRF in dynamic analysis,which overcomes GIRF's limitation in shock identification.According to the results,the dynamic response of real economic growth to monetary policy shocks follows a common trend in different provinces,but with some degree of asymmetry in strength.Similarly,the dynamic response of inflation to monetary policy shocks also shows similarity in terms of trend and heterogeneity in terms of strength across provinces.In addition,there appears to be a regional pattern to the impact of monetary policy shocks on economic activities of various provinces,which is consistent with the regional division of eight comprehensive economic zones.In cumulative sense,the impact of monetary policy shocks on real output is the most noticeable in the northeast and the middle Yellow River region,similar across the middle Yangtze River,the northern coast,the southwest and the eastern coast region,while relatively modest in the southern coast and the northwest region.Secondly,with a preliminary understanding and overall grasp of the regional effect of monetary policy in China,this paper,in the current context of interest rate liberalization and monetary policy framework transformation,further makes an in-depth analysis of its determinants under the new situation.To this end,the paper first compares the price-based monetary policy framework against the quantity-based one,sorts out the traditional interest rate channel of monetary policy transmission mechanism,and thereby pins down the possible stages where regional heterogeneity may arise during the transmission of a price-based monetary policy through the interest rate channel,under the condition of interest rate liberalization.Specifically,given the dominance of the banking system in China's financial system,here the paper has focused mainly on the transmission of the price-based monetary policy through the banking system.After that,these possible stages of regional heterogeneity are then investigated one by one.In Chapter 4,the regional heterogeneity of the interest rate pass-through(the pass-through from the interbank market rate to bank lending rate)is examined.Specifically speaking,using a panel data of 30 provinces in China from January 2011 to December 2016,this paper has constructed,given the limited data availability,in an innovative way a lending rate index for each province,which enables the examination of the interest rate pass-through at the provincial level.Based on this index,the paper has further analyzed and compared the long-run completeness and short-run dynamics of the pass-through from the interbank market rate to bank lending rate across provinces,by carrying out panel cointegration analysis,building ECMs for provinces and estimating with SUR.The results show that there is currently some regional heterogeneity in the interest rate pass-through.Firstly,the long-run completeness of the pass-through from the interbank market rate to bank lending rate is different across provinces.The cointegration coefficient between the lending rate index and 3-month Shibor is relatively dispersed in different provinces,with the null hypothesis of an identical cointegration coefficient across provinces strongly rejected in a formal test.Secondly,there is obvious regional heterogeneity in the short-run dynamics of the interest rate pass-through.Not only the error correction coefficient is relatively dispersed across provinces,where the null hypothesis of an identical error correction coefficient is strongly rejected in a formal test,but also the adjustment speed of the bank lending rate,when there is a change in the interbank market rate,toward its equilibrium is different from province to province.The regional heterogeneity in the interest rate pass-through naturally gives rise to another question:what factors may affect the completeness of the pass-through from the interbank market rate to bank lending rate?Given the key role the financial institutions played during this course,in Chapter 5,the paper goes further,taking the interest rate pricing activity of commercial banks as the foundation,to analyze both theoretically and empirically the relationship between the regional heterogeneity in the interest rate pass-through and the difference in local financial structure such as banking industry competition and marketization of commercial banks' interest rate pricing strategies.To be specific,the paper has first borrowed from the industrial organization theory and constructed a theoretical model describing the interest rate pricing activity of commercial banks,on the basis of which the relationship between the regional heterogeneity of the interest rate pass-through and the difference in local bank competition and marketization of interest rate pricing is further analyzed.After that,the paper has empirically examined the relationship by using a panel data of 30 provinces in China form January 2011 to December 2016 and carrying out full FGLS estimation which allows simultaneously for autocorrelation within panels,cross-sectional correlation and heteroskedasticity across panels.The results prove a close relationship between the regional heterogeneity in the interest rate pass-through and the difference in local financial structure.In regions with a more competitive banking industry and a higher degree of marketization of interest rate pricing,the pass-through from the interbank market rate to bank lending rate will be more complete,i.e.,in the face of a change in the interbank market rate,bank lending rates in these regions will change more fully.After investigating the regional heterogeneity in the interest rate pass-through and its determinants,this paper advances further along the transmission mechanism of the price-based monetary policy to the subsequent stage,the transmission from bank lending rate to regional economic activities.In Chapter 6,the paper,in the current context of transformation of the economic development mode and substantial divergence in local house prices,further examines the relationship between the regional heterogeneity in the sensitivity of consumption expenditure to interest rate and the difference in local house prices,by analyzing the house price's interaction effect when interest rate policy influences consumption expenditure.To be specific,the paper has empirically investigated both the main effect and the interaction effect of house price and real interest rate changes on per capita consumption expenditure,by using a panel data of 285 prefecture-level cities in China from 2005 to 2016,building dynamic panel models and carrying out system GMM estimation.According to the results,there is a negative correlation between per capita consumption expenditure and real interest rate,which leaves the price-based monetary policy such as interest rate policy some space in consumption demand management.However,an increase in the house price will at the same time offset some of the impact from real interest rate on per capita consumption expenditure and therefore weakens the effectiveness of the interest rate policy.In regions with higher house prices,consumption expenditure will be less sensitive to interest rate changes.Consequently,the difference in local house prices will be closely related to the regional heterogeneity in the sensitivity of consumption expenditure to interest rate and therefore may also contribute to the regional effect of price-based monetary policy.After carefully referring to and drawing upon current studies,this paper has made further advances against their limitations with respect to methods and perspectives.The results can well supplement existing studies on the regional effect of monetary policy in China,and will have important implications for the better functioning of monetary policy,the deepening of the financial system reform,the promotion of coordinated regional development,and the realization of all-round development.