An Analysis On The Transmission Mechanisms Of Price-based Monetary Policy And The Extension Of Its Objectives

Nowadays,as interest rate liberalization,exchange rate liberalisation,and interest rate corridor develop,China gradually transfers from quantity-based monetary policy to price-based monetary policy.Price-based monetary policy means that the central bank affects economic behaviour through income expectations and financial costs.Price-based monetary policy mainly relies on indirect regulation with complex transmission mechanisms and sometimes does not work.Hence,this paper specifies transmission mechanisms of price-based monetary policy under different economic situations and concludes that price-based monetary policy does not follow a rigid rule but transfer between different rules.Policy rules could change with economic circumstances.Then what about monetary objectives? Nowadays,inflation and the output gap from ‘Taylor rule' is widely accepted by scholars.A flaw in ‘Taylor rule' is its ambiguity in indicators of inflation and output gap.Late research clarifies those indicators in the perspective of statistics but not of economic intuition.Therefore,to deal with economic imbalances and lack of innovation in economic transition,this paper reconstructs an index of core inflation,figures out the way to achieve growth,and hence provides theoretical support for expanding monetary objectives.Chapter 1 synthesises the development of research on monetary policy.It stresses price-based monetary policy as the main concern by comparing its advantages and disadvantages to quantitybased monetary policy.Chapter 2 gives an overview of China's interest rules.First,this chapter derives two classical goals of monetary policy,inflation and output gap,from an extension of the Taylor rule model.Then use the Markov regime-switching model to observe the central bank's preferences on inflation and output.As a result,the central bank pays more attention to the output when the economy fluctuates wildly but prioritises inflation when the economy is relatively steady.Overall,price-based monetary policy does not follow a rigid rule but different rules according to different situations.Then,what is the rule of changes in policies? This paper will analyse separately transmission mechanisms of price-based monetary policy under fluctuations of housing price,capital account openness,and the US's monetary policy shock.Differences between transmission mechanisms show that China's price-based monetary policy have different rules to follow under different circumstances.Chapter 3 analyses the transmission mechanism between estate price and monetary policy.Use a DSGE model to describe the transmission mechanism of ‘price-based monetary policy ? estate prices ? output and consumption'.By comparing the numerous simulation and VAR pulse diagrams,it finds that estate prices affect the real economy mainly through the consumption channel rather than that of deposit.The result shows that Bernanke's model of financial accelerators does not fit China very well.That model emerges from the Subprime Crisis,which is next to impossible in China,given the strict macroprudential policies.The mechanism that estate prices invalidate price-based monetary policy is the consumption channel.This is because more households are seeing housing as investments,which makes increases in money supply go to the housing market rather than the real economy.As a result,housing bubbles boom,and less capital circulates in the real economy.Chapter 4 investigates the relationship between capital account openness,exchange rate regime,and the effectiveness of monetary policies.This chapter first uses the Mundell-Flemming model to analyse the transmission between these three variables,then examine the theory model by using a regression model with cross terms and dummy variables.The result shows that account openness affects monetary policy effectiveness through flows of international capital,and exchange regimes barely affect that transmission.Hence,China should not liberalise capital account too early because that may cause fluctuations in economy and influence the effectiveness of price-based monetary policies.Chapter 5 analyses the correlation between the US's monetary policy shock and China's pricebased monetary policy.Use an SVAR model to analyse the effects of the US's conventional and unconventional monetary policy shocks on the independence and effectiveness of China's monetary policy.The result shows that the US's conventional monetary policy would greatly influence the independence of China's monetary policy,and the US's unconventional monetary policy would affect both the independence and effectiveness of China's monetary policy.Hence,China should pay more attention to the US's unconventional monetary policy shocks.It can be seen from Chapter 3,4 and 5 that transmission mechanisms of price-based monetary policy are complicated,which can explain why interest rules change,the result given by Chapter 2.Confronted with different challenges,the transmissions between monetary policy and economic variables change,so does the parameters in interest rules.Chapter 6 and 7 focus on the extension of goals of price-based monetary policy to serve economic transition better.Chapter 6 uses a core inflation index,derived from the minimisation of welfare functions,as the target of price-based monetary policy.This chapter introduces sticky price and labour-income share into structural distortions of eight main sectors to measure welfare losses created by price fluctuation in different sectors,and according to which estimate their weights in the core inflation index.The result shows that three sectors including service,food price,and housing have significant distortions in labour,and that two sectors including commute and education have distortions in price.Hence,their weights in the core inflation index are higher than their weight in CPI.The core inflation index is to reduce the welfare losses caused by price fluctuation,not to smooth fluctuation.This index covers more information than before and could help price-based monetary policy improve consumption,investment,employment,etc.Chapter 7 focuses on ‘the transmission between price-based monetary policy and economic growth'.Use a DSGE model to describe the transmission ‘price-based monetary policy ?financial friction ? total factor productivity ? economic growth',and verify the model by comparing numerous simulation with SVAR pulse diagrams.Different from Chapter 6,this chapter does not give a target of potential output.Since the correlation between potential output and other economic variables change over time,the goal of economic growth should not be a static indicator.Growth could be explosive as long as innovation productivity increases.The level of innovation productivity depends on financial frictions.As financial frictions increase,R&D investment decreases,and so does production efficiency and economic growth.Hence,price-based monetary policy should pay more attention to reduce financing costs of enterprises.