| Monetary policy has become an important tool for countries and regions to regulate their economies in order to achieve the goals of stimulating economic growth,stabilizing inflation,promoting employment,and balancing international payments.Historically,classical economics recognized the concept of the "veil of money".However,with the introduction of sticky wages and sticky prices,the notion of "monetary non-neutrality" has become increasingly accepted.The Great Depression of the 1930 s,the period of stagflation in the 1970 s,the Southeast Asian financial crisis of the 1990 s,and the outbreak of COVID-19 in recent years have all seen the effectiveness of monetary policy regulation as an economic stabilizer.Scholars such as Keynes(1936)and Samuelson(1947)supported the active involvement of governments in regulating the economy during the Great Depression and proposed different macro-policy tools depending on the economic conditions;meanwhile,Friedman(1962),Kydland and Prescott(1977),and Barro(1986)advocated for consistent monetary policy to overcome economic dilemmas and warned that discretionary decisions might lead to dynamic inconsistencies during the period of stagflation,ultimately exacerbating economic fluctuations.During the economic crisis in Southeast Asia,when discretionary decisions and monetary policy rules were partially unified,expansion policy rules that respond synchronously to changes in other economic variables became more popular among economists(Persson and Tabellini,1993;Taylor,1999).In the wake of the global economic crisis,the monetary policy regulatory frameworks of various countries have been transformed,with a shift towards a more comprehensive approach to decision-making and operational tools that better serve different macroeconomic regulatory objectives(Glasner,2017;Li and Su,2020;Zhou et al.,2020).Generally speaking,after years of development,various ideological confrontations,references,and disputes,theories related to the effectiveness of monetary policy have not reached a unified conclusion,from whether monetary policy is neutral,to the tit-for-tat relationship between monetary policy rules and discretion,and to quantitative and price-oriented monetary policies being hard to be compatible.In reality,the economic problems faced by the monetary authorities vary widely depending on the situation and the implementation of monetary policy should be adjusted accordingly,leading to the time-varying characteristics of monetary policy,which provides the research foundation of the effectiveness of monetary policy and encourages exploration from a dynamic perspective.Firstly,this paper seeks to examine the time-varying characteristics of priceoriented and quantitative rules in China’s monetary policy from a dynamic perspective.It is widely acknowledged that the implementation of appropriate monetary policy is a key factor for effective macroeconomic regulation and control.Consequently,it is of great importance for China to adjust its monetary policy in a timely manner.To this end,this paper tests the interest rate rule and quantity rule with discretion and constructs a timevarying model to identify the dynamic feedback trajectory of the time-varying parameters of price-oriented and quantitative monetary policy.Moreover,the paper examines the dynamic impulse response of parameters in the interest rate and quantity rules.The results indicate that the monetary policy has shifted to a rule-based approach in recent years,and discretion has been favored during times of severe external shocks.Furthermore,monetary policy has been found to play an important role in countercyclical regulation between output gaps.By the new normal of China’s economy,the interest rate rule has gradually superseded the quantity rule in regulating the output gap,indicating that the interest rate rule pegged to inflation has a stable and continuous regulatory effect,while the quantity rule pegged to inflation has a timely countercyclical effect,albeit with limited success for the past few years.Secondly,a dynamic analysis of the effectiveness of both quantitative and priceoriented monetary policies is conducted,taking the macroeconomy,private economy and financial market as the objects of research.To this end,a time-varying parameter factoraugmented Vector Autoregressive(VAR)model with stochastic volatility and a mixedfrequency VAR model with stochastic volatility factor augmentation are established.The results suggest that loose monetary policy can stimulate economic activity,accelerate inflation and lift asset prices,except in periods such as the global economic crisis.In contrast,tight price-oriented monetary policy will suppress output and financial markets.Moreover,the regulation of inflation can influence residents’ expectations,thus resulting in contrary shock fluctuations.The mixed-frequency approach retains more information,and the empirical research results are more time-varying and have a shorter time lag in showing the impact of quantitative and price-based monetary policies on the economy,providing more guidance for the pre-adjustment and fine-tuning of the central bank.Thirdly,this paper investigates the dynamic efficacy of monetary policy rules and discretion.Using time-varying estimation of the parameters of the new Keynesian model built in this study,we measure the non-linear form of the ratio between the monetary policy rule and the discretionary welfare loss function,and then conduct dynamic simulation analysis of the social welfare loss by changing the parameters that affect the ratio.Our research reveals that,during periods of steady economic growth,the output gap is more likely to be impacted by the inertia of the gap and the forward output gap has less influence on the output gap;inflation is more likely to be affected by the forward inflation,and the inflation inertia has less effect on inflation;price rigidity is small in periods of stable economic development.Generally,monetary policy rules are more effective than discretionary monetary policy in most cases,while the opposite is true during economic downturns.The different preferences of the output gap and inflation during periods of stable economic growth and economic downturns may be attributed to the behavioural characteristics of China’s primary microeconomic entities.Fourthly,this paper designs an admixed monetary policy rule with a discretionary element.In the current economic environment,it is difficult for a single monetary policy rule to accurately capture the dynamic evolution of China’s monetary policy implementation.Therefore,we design an admixed monetary policy rule with discretion,based on micro-foundations,and empirically identify China’s mixed monetary policy orientation and the regulation mechanism with dynamic characteristics.Our findings demonstrate that the mixed monetary policy rules with discretion are better equipped to capture the dynamic endogenous relationship between the monetary policy implementation process and the output gap and inflation,and they typically show favourable countercyclical regulation;yet,the regulatory effect is reduced in times of economic shock.During crisis periods,the central bank should make discretionary decisions to stabilise the economy in the short term,and adopt a mixed monetary policy after the crisis to regulate inflation.Finally,this paper explores the time-varying characteristics and dynamic effectiveness of monetary policy by constructing a macro-control effect simulation of different monetary policy rules with discretionary elements in a dynamic stochastic general equilibrium(DSGE)framework.The model considers price and wage stickiness and analyzes the regulatory effects of policy shocks on real output,inflation,and price level under the Taylor Rule,Friedman rule,and an admixed monetary policy with discretion.Results show that price-oriented monetary policy tools have greater impulse responses to macroeconomic variables,with response intensity and peak time being more significant than those of quantitative and mixed monetary policy tools.Moreover,there is uncertainty about the impact of tightening monetary policy shocks on inflation,which is significantly reduced under the mixed monetary policy rule.When the central bank has equal preferences for quantitative and price-oriented monetary policy tools,the mixed monetary policy regulation effect is closer to using quantitative monetary policy alone and effectively synthesizes the advantages of both tools.This exploration provides empirical evidence for the research on the effectiveness of monetary policy from a dynamic perspective,contributes to resolving the debates in the study of the effectiveness of monetary policy,and has certain reference significance for the central bank’s policy implementation.This paper examines the time-varying characteristics and dynamic effectiveness of monetary policy by comprehensively investigating the dynamic effectiveness of monetary quantity rules,interest rate rules,quantitative and price-based monetary policy tools in terms of stimulating the economy and smoothing economic fluctuations.It also analyzes the dynamic changes in the ratio of monetary policy rules and discretionary dynamic social welfare losses,speculates on the selection between monetary policy rules and discretion in different periods,and constructs a new admixed monetary policy rule with discretion.The policy effect is compared and simulated in a Dynamic Stochastic General Equilibrium(DSGE)model and its applicability is verified.This paper provides empirical evidence on the effectiveness of monetary policy from a dynamic perspective,thereby contributing to the debates in this field and offering reference significance for the central bank’s policy implementation. |
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