The Effectiveness Of Monetary Policy In The Global Financial Cycle

US monetary policy can influence peripheral countries' economic and financial markets through capital flow,bank balance sheet,foreign exchange as well as other channels because the US dollar is in the important position in international currency and United States is the most developed country in the world.The spillover effect of US monetary policy affects the effectiveness of peripheral countries' monetary policy.This paper reviews the literature from five aspects: international monetary system,spillover effect of US monetary policy,capital flow,the Global Financial Cycle,independence and effectiveness of monetary policy.Furthermore,this paper establishes multisectoral DSGE models for the Global Financial Cycle and discusses the impact of the Global Financial Cycle on the monetary policy of peripheral countries from three perspectives.From the perspective of the linkage of monetary policy in various countries,this paper finds that the logic behind of the Global Financial Cycle phenomenon is that monetary policy of peripheral countries is not independent because of the spillover of US monetary policy.From the perspective of social welfare,this paper finds that a slight positive global risk shock can improve the welfare but a sharp risk fluctuation will significantly reduce the peripheral countries' social welfare.From the perspective of credit transmission channel of monetary policy,this paper explores the influence of Global Financial Cycle on credit financing of Chinese listed enterprises.Through constructing a two-country DSGE model including bank and financial friction,chapter 3 provides a theoretical support for the existence of Global Financial Cycle.The monetary policy of the United States is transmitted to the peripheral countries' financial market through capital flow,which makes the peripheral countries' credit,asset price,risk-taking and leverage of the converge with those in United States,forming a Global Financial Cycle.The impact of US monetary policy spillover on financial market is faster than that on real economy,which leads to the deviation of domestic economic cycle and financial cycle in peripheral countries.If peripheral countries want to stabilize their economy,they have to keep monetary policy change in the same direction as US monetary policy.As a result,independence of monetary policy will no longer exist.With the global finance becoming highly integrated,the valuation effect is more and more obvious.Floating exchange rate system cannot isolate the impact of global financial cycle and guarantee the independence of monetary policy.As long as a country's capital account is open,it will expose to the Global Financial Cycle.The less developed the peripheral countries' financial markets are,the more independent the monetary policy is.Extending Christiano et al.(2014)to a two-country DSGE model of two countries to describe the Global Financial Cycle,chapter 4 simulates how and how much the Global Financial Cycle influence the economic and financial variables of the periphery countries.Through welfare analysis,the paper quantifies the impact of global financial cycle on the effectiveness of peripheral countries' monetary policy.Bayesian estimation based on the macro quarterly sample data from 2000 to 2018 shows that the Global Financial Cycle has a significant impact on China's economic and financial variables.This paper finds that the interest rate level of the Federal Reserve is closely related to the uncertainty of the international financial market.Due to capital flow and information asymmetry,the risk shock in the international market is transmitted to the domestic market of the peripheral countries through two channels—risk and quantity,which makes the financial cycle of the peripheral countries and the gloabal financial cycle synchronized.Using interest rate rules to stabilize exchange rate can't take into account the multiple objectives of macroeconomic policy while using foreign exchange reserves to actively intervene in exchange rate can reduce the contradiction between macroeconomic stability and financial stability of monetary policy.Further welfare analysis shows that a slight positive global risk shock can improve the social welfare,and floating exchange rate can't offset the impact of the global financial cycle on peripheral countries.The best way to resist the negative effects of the global financial cycle and ensure the effectiveness of monetary policy is to use foreign exchange market intervention to cooperate with the monetary policy that focuses on output and inflation.There is an optimal level of foreign exchange intervention.Using the global risk aversion VIX as the proxy index of the Global Financial Cycle and the change of credit financing of Chinese listed companies as the micro observation of the effectiveness of credit transmission channel of China's monetary policy,chapter 5 finds that when the global risk aversion mood rises,the credit financing of Chinese listed companies decreases.VIX affects credit financing through two channels: the demand of enterprises and the supply willingness of banks.Banks take more risks when the interest rate is low.As a result,loose monetary policy position will enlarge the negative impact of global risk aversion on corporate credit financing.China's state-owned enterprises have natural advantages in obtaining bank loans,so the impact of global risk aversion on nonstate-owned enterprises is greater than that on state-owned enterprises.Enterprises in areas with more developed finance market are more affected by Global Financial Cycle.Although financial openness can bring more capital,it will also bring more risks.The policy implication of this paper is that the Global Financial Cycle is the inevitable result of US monetary policy spillover.In order to cope with the uncertainty of global financial cycle and US policy,it is still necessary to have sufficient foreign exchange reserves and timely foreign exchange market intervention.Before the further opening of capital account,China need to accelerate the reform of interest rate liberalization and improve the exchange rate formation mechanism,ease interest rate constraints and maintain the basic stability of RMB exchange rate at a reasonable and balanced level.Finally,macro policy coordination is also essential.