Research On The Effect Of Monetary Stabilization Policy Of China In The Systemic Risk Scenario

The Global Financial Crisis(GFC)and its aftermath keep forcing academics and policymakers to rethink stabilization policy,with a particular emphasis on the reappraisal of effect of monetary stabilization policy.Before the GFC,the consensus of monetary policy was to focus on price stability instead of dealing with financial factors such as credit and asset prices.The GFC has forced academics and monetary policy makers to rethink the complexity and the role of the financial sector,the dynamic evolution of financial systemic risks in the financial system is an eternal existence.This reflection is subversive.The mainstream economic theory before the GFC is based on the Rational Expectation Hypothesis and the Efficient Markets Hypothesis(EMH).It believes that the financial market is complete and there are no financial frictions.Therefore,in the analysis of stabilization policy,financial system risks were not considered.However,the systemic risks were generated in the financial system endogenously.During the upswing of business cycle,the financial systemic risks were accumulated through the increasing leverage rate and excessive risk-taking.And then the credit supply increased,which also pushed up the business cycle boom,in this period,systemic risks are often underestimated.During the downswing of business cycle,systemic risks appeared,the financial sector began to deleverage and reduce risk-taking,the credit supply decreased,and the recession was amplified.The extreme case is the financial crisis.With the increasing awareness of systemic risks,the analysis of the effects of traditional monetary stabilization policy are difficult to apply directly to policy practices in the post-crisis era,and the central bank is faced with the dilemma that monetary policy cannot effectively stabilize economic.This is because the analysis of the effect of traditional monetary stabilization policy is based on the stability of the financial system,and when systemic risks damage the function of the financial system,it is necessary to re-evaluate the effect of monetary stabilization policy.This paper studies this issue in order to improve the framework of monetary stabilization policy and achieve economic and financial stability effectively.Firstly,this paper summarizes the theoretical framework of traditional monetary stabilization policy,and concludes that the consensus of the monetary stabilization policyframework before the GFC is that the central bank affects short-term rates through four tools-policy rates,open market operations,standing facilities,and statutory deposit reserves,and then the interest rate affects aggregate demand through two types of mechanisms-neoclassical channel and non-neoclassical channel,so as to achieve mid-term and long-term price stability and short-term trade-offs between price stability and output stability,and maximize social welfare ultimately.Secondly,by defining and describing the systemic risk scenario and introducing it into the theoretical framework of the traditional monetary stabilization policy effect analysis,we get: First,the neglect of financial stabilization goal leads to incentives for systemic risks in the financial system and accelerates the formation of systemic risk scenario.Second,in systemic risks scenario,the mechanism of traditional monetary stabilization policy is blocked.Monetary policy cannot stabilize the financial system to cut off the positive feedback mechanism between macro and finance,nor can it be transmitted to the real economy to stabilize price and output.Third,in systemic risks scenario,traditional monetary policy tools were limited.Fourth,according to the IS-MP model that introduces financial intermediation and financial risk,in systemic risk scenario,the credit supply of financial intermediaries is reduced,and the output stabilization effect of traditional monetary policy is weakened.Thirdly,this paper develops modified CRITIC method with time-varying weights.According to this method,the Financial Stress Index of China(CFSI)is constructed.Combining it with the data of China,this paper constructs the Markov Switching Vector Autoregression(MS-VAR)Model to identify the systemic risk scenario,and evaluate the effects of monetary stabilization policy under different macro and financial regimes(e.g.normal times and systemic risks scenario).The results show that,in normal times,the effect of monetary stabilization policy is basically consistent with the traditional economic theories;while in a systemic risk scenario,the impact of traditional monetary policy on output stabilization and prices stabilization are weakened.Finally,in order to achieve the effect of monetary stabilization policy effectively,this paper summarizes the relevant adjustments of the monetary stabilization policy framework in the post-crisis era,and concludes that the trend of the reconstruction of the monetary stabilization policy framework is: First,it is necessary to add financial stability considerations to stabilization goals;second,it is necessary to innovate monetary policytools and expand the stabilization toolbox;third,it is necessary to improve the mechanism for monetary stabilization policy so as to achieve financial stability and real economy stability.This provides a reference for how to improve the effect of China’s monetary stabilization policy in a systemic risk scenario.The results show that,on the one hand,the central bank should incorporate financial stability into the monetary stabilization policy framework,innovate monetary policy tools,and improve the mechanism so as to achieve the effect of monetary stabilization policy more effectively in systemic risk scenario.On the other hand,coordination between stabilization policies should be strengthened.Monetary policy needs to improve coordination with macro-prudential policy and fiscal policy.The latter two,like monetary policy,also have an important role in financial stabilization.Combining macro-prudential policy and fiscal policy to reduce risks can make monetary policy play a more effective role in stabilization policies,so as to achieve macroeconomic stability,and maximize social welfare.