Research On The Impact Of Financial Cycle On Monetary Policy Effectiveness In China

During the global financial crisis,the large fluctuation of financial markets leads to a negative impact to the macro economy.Scholars start to rethink the traditional business cycle theory,and then the financial cycle theory provides a new analytical perspective and idea for the long-term economic growth.While the traditional monetary policy is mainly to deal with business cycle and economic fluctuation.For many years,central banks have consistently stabilized price as the single target of monetary policy.But the global financial crisis has made people realize that price stability does not mean financial stability,there is a financial cycle outside the business cycle.As an important part of macroeconomic policy,monetary policy has always played an important role in the economic counter-cyclical adjustments,but the role in the financial counter-cyclical adjustments needs a further exploration.From the actual situation in China,with the deepening of financial globalization and interest rate marketization,the links between domestic financial markets and international financial markets are closer,and the types of financial products are more abundant.The financial sector has greatly promoted China's economic growth,while it has also accumulated some risks.In recent years,the growth rate of real economy has declined,meanwhile asset prices have risen sharply.The financial cycle and business cycle begin to differentiate,and the risks and vulnerabilities of financial system gradually increase.At the same time,the characteristics of global financial cycle are becoming more obvious,and its procyclicality and leverage amplification enlarge the complexity of macroeconomic management.All of these put forward higher requirements for monetary policy and financial regulation.Therefore,from the perspective of financial cycle,this paper deeply studies China's monetary policy adjustments in recent years.Firstly,this paper applies BP filter and principal component analysis to measure China's financial cycle,and analyzes the characteristics,the status quo,and the potential risks at current stage.It can be found that,after China enters the upward period of financial cycle in 2008,non-financial corporate sector,government sector,and resident sector successively add leverage to promote three-round business cycle.The financial cycle has risen sharply and is now at a high point.The positive effects of the upward period of financial cycle on the business cycle have weakened.As China's financial cycle has approached peak stage,some risks and problems such as excessive debt expansion and “crowding out effect” on manufacturing have gradually emerged.Secondly,this paper discusses the effectiveness of monetary policy regulation.From the monetary policy practice since the central bank was established separately,this paper collects the applications and effects of quantitative and price-based monetary policy regulation,and then empirically analyzes the effectiveness of monetary policy regulation by using TVP-VAR model.It can be found that monetary policy regulation is generally effective,but the effectiveness has differentiated.The financial innovation products priced at market interest rates develop rapidly,which has increased the sensitivity of market participants to interest rates.The price-based regulation will play an increasingly important role in the monetary policy framework.Thirdly,this paper comprehensively discusses the impact of financial cycle on monetary policy.It not only theoretically studies the impact of financial cycle on monetary policy,but also builds LT-TVP-VAR model,empirically analyzing the time-varying response paths of different monetary policy forms to financial cycle,output gaps and inflation gaps.It can be found that price-based monetary policy is increasingly used to deal with business cycle and economic fluctuations,while quantitative monetary policy is used more to deal with financial cycle and leverage fluctuations.Monetary policy needs to balance macroeconomic costs of short-term business cycle with risk accumulation of longterm financial cycle,and closely cooperate with macro-prudential policy to cope with financial cycle.In fact,China's monetary policy mainly implements economic countercyclical adjustments,and the financial cycle would only be considered at a certain stage.When the business cycle and financial cycle are not synchronized,the financial countercyclical adjustments would often give way to the economic counter-cyclical adjustments.This is to smooth economic trend by financial pro-cyclical operations.However,China's financial cycle is already at a high point in the interval,the policy of financial pro-cycle hedging economic counter-cycle is becoming more difficult.Fourthly,this paper extends the financial cycle into a global financial cycle,and studies how the global financial cycle transforms the “trilemma” into a “dilemma”.This paper theoretically analyzes the impact of global financial cycle on monetary policy,and quantitatively studies the “dilemma” and monetary policy effectiveness under the global financial cycle by MS-VAR model.It can be found that the “trilemma” can be transformed into a “dilemma” under certain conditions,but the “dilemma” only occurs during the period of shocks and risk aversion risen.When the global financial cycle highly fluctuates,the “dilemma” could restrict monetary policy to make a difference.On the one hand,when risk aversion of investors rises,investment behavior is focused more on stability.If monetary policy maintains independence and does not follow pricing,it would easily lead to expansion of domestic and foreign spreads,resulting in a large outflow of capital.On the other hand,even if monetary policy adopts the strategy of following pricing,the impact of monetary policy on capital flows only has short-term effects.In other words,one-off policy change could not effectively maintain capital inflows,and excessive use of interest rate instruments are likely to hurt the real economy and reduce the of space monetary policy.At this point,monetary policy requires interest rates to follow pricing,and also cooperating with macroprudential policy of cross-border capital flows to reduce procyclical market volatility and stabilize market expectations.Finally,considering the impact of financial cycle on monetary policy effectiveness,in order to balance the short-term economic goals with long-term risk accumulation,external policy and risk shocks with internal economic goals,some policy recommendations are as follows.Firstly,the autonomy and effectiveness of monetary policy regulation should be enhanced.In the policy formulation,government should consider the short-term business cycle and the medium and long-term financial cycle,and strengthen the complementary role of structural monetary policy.The interest rate transmission channel should be unblocked to strengthen price-based regulation mechanism.While the quantitative monetary policy tools should be improved to guide credit growth reasonably.Secondly,the role of dual-pillar policy framework of “monetary policy + macroprudential policy” should be fully utilized.Government should strengthen the coordination of monetary policy and macroprudential policy to reduce policy conflicts.The macroprudential policy covering real estate should be improved to prevent excessive expansion of real estate credit.And the macroprudential policy of cross-border capital flows should be completed to restrain pro-cyclical leverage and short-term speculation.Thirdly,the globalized and in-depth dynamic perspective of monetary policy regulation should be improved.Government should strengthen the international coordination of monetary policy to deepen mutual trust and communication mechanisms.The foreign exchange intervention strategy framework should be built to strengthen the guidance of exchange rate expectations.The supply-side structural reform should be further deepened to solve deep-seated problems.This means that all government departments should be clearly defined of power and responsibility,and thus forming a policy synergy.