Research On Monetary Policy Regulation From The Perspective Of China's Financial Cycle

With the continuous improvement of financial liberalization and financial deepening,financial cycle fluctuations have become more frequent and intense.It has led to severe financial crises several times,which dealt a huge blow to the real economy.Moreover,financial cyclical fluctuations play an increasingly important role in the practice of monetary policy regulation.After the 2008 international financial crisis,academic circles and monetary authorities of many countries have deeply reflected on the traditional monetary policy model.They realized that price stability is not a sufficient condition for economic and financial stability,and it is difficult to balance the dual stability of economy and finance with a monetary policy regulation model that only focuses on inflation.At present,in the face of severe internal and external shocks,the effectiveness of traditional monetary policy control models and tools is gradually weakening.The new macro-control model and policy thinking including financial asset price control and financial stability goals have begun to be applied in practice.Therefore,in this paper,financial factors are fully incorporated into the monetary policy control framework,and the regulatory mechanism and effects of China's monetary policy in different economic and financial environments are investigated from the perspective of the financial cycle,so as to provide theoretical support and empirical evidence for the birth of new macro-control model and policy thinking.This is the key for China to win the battle of "preventing and resolving major risks" and achieve stable and healthy economic development as a whole.The financial cycle essentially characterizes the dynamic volatility between financial expansion brought about by rising asset prices and financial risks.That is to say,the variation characteristics of asset price and financial stability are two important dimensions of financial cycle.The relationship between the two is not a simple reverse or forward matching relationship,but presents many different matches following the cycle.Therefore,this article divides the financial cycle into a "financial price cycle" and a "financial stability cycle".Based on these two main lines of logic,the control mechanism and control effect of monetary policy are analyzed from the perspective of China's financial cycle under the research thinking of "Documents,concepts and theoretical basis?Analysis of the current situation of China's financial volatility and monetary policy regulation?The theoretical analysis framework of monetary policy regulation from the perspective of the financial cycle?Measurement of China's financial cycle and analysis of characteristics?An Empirical Test of the Effect of Monetary Policy Regulation from the Perspective of Financial Price Cycle and Financial Stability Cycle ? Conclusions,Recommendations,and Research Prospects".This paper is arranged as follows.In the first and second chapters,the related literature research,core concepts,and theoretical basis of monetary policy regulation are elaborated and summarized from the perspective of the financial cycle.On this basis,the current situation of China's financial environment and monetary policy regulation is comprehensively analyzed in the third chapter to provide a realistic foundation for the research of this paper.In the fourth chapter,a theoretical analysis framework is established based on the two main lines of the "financial price cycle" and the "financial stability cycle",and then the research hypothesis of the later empirical test analysis is proposed.In the fifth chapter,the principal component analysis method is employed to fit China's financial asset price index,and the DCC-GARCH method,non-parametric kernel estimation,and extreme value theory are used to measure China's financial stability index.Then,the financial price cycle,financial stability cycle,and economic cycle are measured based on the CF filter,and the dynamic relationship between the financial price cycle and the financial stability cycle is quantitatively studied using the TAR model.Afterward,empirical tests are conducted with the two main lines of "financial price cycle" and "financial stability cycle" in the sixth and seventh chapters.In the sixth chapter,the TVP-SV-VAR model is adopted to empirically test the time-varying characteristics of monetary policy regulation effects from the perspective of financial price cycles,and to explore the dynamic relationship between asset prices,economic fluctuations,and inflation.In the seventh chapter,the financial stability variable is included in the monetary policy control framework;the time-varying characteristics of the monetary policy control effect are empirically tested based on the LT-TVP-VAR model from the perspective of the financial stability cycle;besides,the dynamic linkage mechanism between economic fluctuations,inflation,and financial stability is discussed.In the empirical part,the time-varying characteristics of the effects of monetary policy control in different stages of the financial cycle are investigated,and the dynamic relationship between control targets is comprehensively analyzed.This provides empirical evidence for the construction of a monetary policy regulation framework that takes into account both economic and financial stability.Finally,relevant policy recommendations are provided in the eighth chapter based on the results of empirical analysis,and prospects of future research in related fields are presented.According to the above research content,the following main research conclusions and policy recommendations are drawn:1)The linkage between financial price cycle and financial stability cycle has asymmetric effect and threshold effect.In the stage of falling financial asset prices,falling asset prices reduce the level of financial stability.In the stage of a slow rise in financial asset prices,the economic and financial environment is in a "comfort zone",and a moderate increase in financial asset prices helps financial stability.When the single-season increase of financial asset prices is higher than the threshold of 7.32%,the excessive growth of asset prices increases the instability of the financial system.Therefore,it is necessary to pay attention to the period of asset price decline and excessively rapid increase,and choose appropriate macro-control measures to make asset price changes return to the "comfort zone."2)In the period of the cycle when financial asset prices are reasonable,China has a "financial accelerator effect." Monetary policy can effectively regulate asset prices,the real economy,and inflation.However,the degree of influence of monetary policy on the real economy has been diminishing with time during the study period.In other words,the effectiveness of the monetary policy transmission channel of "implementing expansionary monetary policy?real economic growth" is decreasing.This suggests,to a certain extent,that the binary separation between the real economy and the virtual economy is gradually increasing.During the period of high financial asset prices,the "rational asset price bubble effect" dominates.At this time,asset prices may rise as interest rates increase and the money supply decreases.The adoption of a tightening monetary policy would not only severely affect the real economy in the long term but also make it difficult to control the high asset price and product price.Therefore,it is necessary to cautiously adopt the monetary policy rules of "moving against the wind" in the period of high financial asset prices.It is recommended to focus on changing the expectations of financial asset returns and even implement temporary administrative measures to alleviate financial bubbles.3)In the cycle of financial stability,monetary policy can effectively regulate the real economy,financial stability and inflation.This indicates that implementing an expansionary monetary policy that lowers interest rates or increases money supply can boost the real economy,effectively alleviate capital shortages in the financial market and improve financial stability.In the period of financial instability,expansionary monetary policy could significantly reduce the effectiveness of stabilizing the financial system and boosting the real economy.In extreme cases,loose monetary policy could even further push up systemic financial risks.This could be explained that due to the period of high financial instability,its normal financing function and the vitality of the real economy have greatly decreased.The flood of liquidity brought about by the expansionary monetary policy may further "draw blood" from the real economy and damage the real economy.Besides,the implementation of a tightening monetary policy,after the "new normal",has a lasting impact on raising prices.Thus,the traditional theoretical relationship between monetary policy and inflation has been challenged.The above phenomenon may be caused by the fact that after the subprime mortgage crisis,the United States and China both rely more on unlimited QE and new structural monetary policies to get rid of the financial crisis and promote the development of the real economy.4)Regarding the relationship between the control targets,in the period of the financial asset price reasonable cycle,asset price increases can promote economic growth in the short term while the long-term effect is very weak.Economic growth and price levels exhibit a positive correlation.In the period of high financial asset prices,there is a relatively large degree of price bubbles in the capital market.At this time,the boosting effect of asset prices on the real economy not only diminishes but even inhibits the development of the real economy.And the economic growth at this stage is more manifested in the rise of asset prices,with less impact on the price level.Moreover,inflation,economic growth,and financial stability are generally in a state of positive interaction as the Chinese economy gradually enters the "new normal".And this kind of relationship has a "multiplier" effect in the cycle of financial stability.However,it is often difficult to achieve a harmonious and unified state between the control targets in the period of financial instability.Therefore,at this stage,especially in the period of financial stability,it is feasible to adopt appropriate monetary policies to simultaneously achieve price stability and financial stability control goals and to achieve the dual goals of "stabilizing growth and preventing risks".5)Based on the above research conclusions,the following policy recommendations are proposed:(1)establish a sound asset price change monitoring system,and accurately grasp the laws,characteristics,and current stage in China's financial stability cycle,so as to enhance the accuracy and effectiveness of monetary policy regulation;(2)improve and perfect the target and "multi-tool" system of China's monetary policy regulation;(3)strengthen the coordination and cooperation between China's monetary policy and macro-prudential policies;(4)assist in the introduction of fiscal policies,capital market reforms,and other related supporting policies.The possible innovations of the paper are:1)In previous studies,the credit cycle,asset price cycle,and financial stability are often completely combined to form a financial cycle.However,the financial cycle formed in this way includes not only the real economy and policy information contained in the credit cycle,but also the financial market information reflected in the asset price,and the financial stability includes both the financial market information and the real economy information.The financial cycle formed in this way is unsuitable in terms of serving as a tool,channel,or target of monetary regulation.Therefore,the financial cycle is divided into "financial price cycle" and "financial stability cycle" in this paper.The characteristics of China's financial cycle are mainly measured and described from two perspectives: asset prices and financial risks.Then,the regulation mechanism and regulation effect of monetary policy are investigated from the perspective of the financial cycle according to these two logical main lines.This can not only lay a theoretical foundation for the in-depth study of the subsequent monetary policy control framework but also provide empirical evidence for the monetary authorities to take targeted,accurate and effective monetary policy control measures according to the cycle stages and policy objectives.2)A series of non-linear financial measurement models are used,including Time-Varying Parameter Vector Auto-Regression Model with Stochastic Volatility(TVP-SV-VAR),Threshold Autoregressive Model(TAR)based on the "threshold effect" of the interaction between macroeconomic and financial variables,and Latent Threshold Time-Varying Parameter Vector Auto-Regression Model(LT-TVP-VAR),to more accurate and comprehensive describe the heterogeneity of monetary policy control effects that depend on the financial cycle.This provides empirical evidence for the non-linearity and asymmetry of monetary policy control effects and the time-varying nature of structural shock volatility under different stages of the financial price cycle and financial stability cycle,contributing to the discretionary choice of monetary policy in a complex economic and financial environment.3)Based on the balance sheet,principal component analysis is performed in this paper to construct the financial asset price index including major financial assets stocks,bonds,funds,and real estate,which can comprehensively reflect China's overall asset price situation,and thus more accurately and objectively demonstrate the degree of bubbles in China‘s asset prices and the level of financing costs in different stages.This is not only conducive to the establishment of a sound financial asset price monitoring system in China,but also provides empirical support for monetary policy to accurately regulate the real economy and financial markets based on asset price channels.Financial asset prices are an essential channel through which monetary policy is transmitted to the real economy.Nevertheless,most current research objects worldwide are single asset prices such as stock prices or real estate prices.Consequently,it is difficult to fully reveal the impact mechanism and degree of China's monetary policy based on asset prices channel on the real economy,and this would also affect the judgment of the source and intensity of systemic financial risks and the choice of monetary policy.4)From the perspective of systemic financial risk,the SRISK index under the concept of strict consistency risk measurement ES is employed to measure China's financial stability index.This method makes full use of financial market information and considers the enhanced risk tail correlation,especially including financial data such as the leverage ratio and capital of financial institutions.Finally,the risk is implemented in the amount of capital shortage in the entire financial system,providing a more accurate quantitative foundation for financial supervision and policymaking.Moreover,further improvements to this method have been made in this paper.Specifically,a DCC-GARCH model is applied to capture the correlation between financial institutions,extreme value distribution is used to more accurately describe the peak and thick tail characteristics of systemic financial risk,and the absolute capital shortage is replaced with the proportion of capital shortage in the total capital of the entire financial system.This helps to more accurately examine the characteristics and trends of China's financial stability and more scientifically and accurately monitor the financial imbalances of macroeconomic operation in the new era.