Research On The Uncertainty Of China's Monetary Policy

During the 2007-2009 international financial crisis,the world economy uncertainty soared and caused economic individuals to delay consumption and investment plans.After the international financial crisis,the slow world economic recovery has been accompanied by the rising uncertainty.At the moment,trade protectionism in the United States is rising,and trade frictions have been frequently launched against other countries,which further aggravates the uncertainty of the world economy.Thus the research on uncertainty has important practical significance.In the field of macroeconomics,uncertainty research mainly relies on the stochastic volatility model.This paper uses the stochastic volatility model as the basic tool to study the relationship between the uncertainty of China's monetary policy and the economic fluctuations,bank leverage,and the transformation of monetary policy regime.The basic problem studied in Chapter Two is the impact of the uncertainty of monetary policy on China's macroeconomy.The ultimate goal of the monetary policy of the People's Bank of China is to maintain price stability and promote economic growth.However,as China's economy is in a period of development and transformation,monetary policy must also consider the promotion of employment,the balance of international payment,the promotion of financial reform and opening up,the development of financial market,and the coordination with fiscal policy.Therefore,China's monetary policy is greatly complicated.Based on the dual goals of monetary policy,maintaining price stability and promoting economic growth,this chapter uses the stochastic volatility model to study the uncertainty of China 's monetary policy and its impact on the macroeconomy from the perspective of policy rule equation.Monetary policy rule equation is a summary of the behaviors of the monetary authority and includes monetary policy ultimate goals and monetary policy tools.For monetary policy ultimate goals,this chapter selects inflation rates and output gaps.An important characteristic of China's monetary policy regime is the combination of money quantities and interest rates.Thus for monetary policy tools,interest rates and M2 growth rates are both selected in the monetary policy equation.According to the uncertainty literature,the standard deviation of the residual term of the monetary policy equation can represent the uncertainty of monetary policy.This chapter uses the stochastic volatility model and applies particle filter method to estimate the volatility of the residual term,and obtains the time-varying uncertainties of China's monetary policy from 2000Q1 to 2016Q4.The estimation results show that the volatilities of China's monetary policy change significantly over time during the sample period.The three most uncertain periods of monetary policy are 2008Q4-2009Q1,2013Q2-Q3,and 2015Q1-Q2.These three periods coincide with the complex and changing economic situations and policy environments at the time.The monetary policy volatility estimated in this article is consistent with economic facts.At the same time,this chapter also compares the estimated volatility time series with the uncertainty index of China's monetary policy constructed by newspaper text analysis,and the results show that the two time series are well correlated.This further shows that monetary policy rule equation can be used to estimate monetary policy uncertainty.In order to identify the impact of monetary policy uncertainty shocks on the macroeconomy,this chapter uses the estimated monetary policy volatility as one of the variables of the structural vector autoregressive(SVAR)model and analyzes four main aggregate variables: output,consumption,investment and price levels.The results of the impulse response show that when the monetary policy uncertainty increases,the four macroeconomic variables all decrease,and the investment responses the most strongly.The same direction of changes in output and prices indicates that monetary policy uncertainty shock is a kind of demand shock.To explain and replicate the conclusions obtained from the VAR model,this chapter constructs a new Keynesian dynamic stochastic general equilibrium(DSGE)model.In the model,the Chinese monetary policy with time-varying volatility are set through the stochastic volatility model.The DSGE model replicates the results in the VAR model well.The four macroeconomic variables show downward responses when monetary policy uncertainty rises.Investment is the most sensitive macroeconomic variable to the monetary policy uncertainty shock.The monetary policy uncertainty shock is a demand shock.Based on the previous research,Chapter 3 also uses the stochastic volatility model to study the relationship between monetary policy uncertainty and bank leverage.The financial crisis of 2007-2009 was,to a certain extent,related to household leverage and bank leverage in the economy.After the financial crisis,the issue of bank leverage has also attracted widespread attention from both academics,industries and governments.The logic is that high leverage weakens the financial system's ability to resist small shocks,which easily triggers the so-called “Minsky Moment”,a situation where the asset values collapse sharply and business cycle fluctuates.At the policy field,after the international financial crisis,many countries and international economic organizations began to emphasize the stability of the financial system.The Basel II focused on monitoring capital adequacy ratios.Before the international financial crisis in 2007-2009,major commercial banks in Europe and the United States met the capital adequacy ratio requirements,but were still unable to completely withstand financial shocks.One reason is that these banks had higher leverage before the crisis.This shows that the single regulation of capital adequacy ratio is no longer in line with reality.To compensate for this policy shortcoming,the Basel III introduced a second regulatory indicator,leverage ratio(reciprocal of leverage multiple).Correspondingly,China introduced the “Measures for the Administration of the Leverage Ratio of Commercial Banks” in 2011,which stipulated that the leverage ratio of commercial banks should be above 4%.Compared with the 3% required by the Basel III,China has adopted stricter management of commercial banks' leverage and paid more attention to the stability of the financial system.This chapter uses the quarterly financial statements of A-share listed commercial banks from 2003 to 2018 and the estimated time series of China's monetary policy uncertainty in Chapter 2 to analyze the impact of monetary policy uncertainty on the leverage decisions of commercial banks.The regression results of the benchmark model show that after adding fixed effects and control variables and controlling heteroscedasticity and cross-section correlation over the same period,the coefficient between bank leverage and monetary policy uncertainty is negative,significant at the 1% level.In the robustness test,after adding seasonal factors,interest rates,and M2 growth rates to the model,the regression results are still robust,and the coefficient between bank leverage and monetary policy uncertainty is still significantly negative at the 1% level.Empirically,there exists a conclusion that when the uncertainty of monetary policy rises,commercial banks will significantly reduce leverage.To explain the conclusion obtained from empirical analysis,this chapter constructs a new Keynesian dynamic stochastic general equilibrium model,adopts the “costly enforcement” setting to internalize bank leverage,and also sets up China's monetary policy hybrid rule with time-varying volatility.The impulse response results show that when the uncertainty of monetary policy unexpectedly rises,banks will choose to increase loan interest rates,increase their own capital,and thus reduce their leverage multiple.This is consistent with the previous empirical analysis result.Chapter 4 is also based on the stochastic volatility model.In the vector autoregression model,assume that parameters and volatilities are time varying,and then identify the shocks of interest rate and money growth.Through the forecast error variance decompositions of output growth and inflation rate,this chapter studies the process of the switch of China's monetary policy regime from the money quantity based to the interest rate based.In 1998,the People's Bank of China began to imply M2 as the intermediate target.However,with the reform of interest rate liberalization and the development of financial markets,the People's Bank of China began to discuss to use interest rate as the intermediate target of monetary policy in the future.“The Thirteenth Five-Year Plan” further proposed that monetary policy regime should be shifted to price based.The necessary condition of the constant coefficient vector autoregression model is that the economic system is stable.But it is not suitable for studying China's monetary policy in transition.This chapter uses the time-varying parameter vector autoregression model with stochastic volatility and selects four main macroeconomic variables,GDP growth rate,inflation rate,interest rate,and money growth rate to study the transition of China's monetary policy control system.This chapter contains three main results.First,before the implementation of the four trillion stimulus plan in 2009,the impulse response function of the economic system did not change significantly,indicating that the structural change of the monetary policy system was small;after that,the impulse response function of the economic system changed greatly: the responses of economic growth and inflation rates to interest rates widen,and the responses to money growth rates diminish.Second,the forecast error variance decompositions show that after the implementation of the four trillion stimulus plan in 2009,the impact of interest rate shocks on the variances of economic growths and inflation rates have increased,and interest rate policy tools have become increasingly important in the monetary policy control system.The central bank's monetary policy control system is changing from a money quantity-based to an interest rate-based.Third,through counterfactual analysis,this chapter examines the impact of structural changes in the monetary policy regime after 2009 on GDP growth rates and inflation rates.The results of the counterfactual analysis show that the four trillion stimulus plan smoothes the economic growth rate,makes the economic growth 0.7% higher,but this result is not statistically significant.Some robustness checks are performed at the end of this chapter to support the reliability of the main conclusion.