Research On China's Deflation And Monetary Policy Effectiveness

Since 1990s, deflation has occurred all over the world and impacted negatively on global economic growth. So economics research fields in the world concern it. Due to global deflation and China's own economic problems, deflation has occurred in China since 1997 and continued until now.The main object of this paper is to evaluate China's monetary policy effectiveness and to put forward policies to improve it by means of research on China's deflation and monetary policy. At first the paper introduces the general theory of deflation, gives the definition of deflation and its judge rule, criticizes multi-rule, and gives the explanation of deflation's measurement. Secondly, the paper analyzes China's deflation. The paper gives the global background of it and analyzes the monetary reasons and the harm of this deflation in details. The core of the paper is the evaluation to China's monetary policy effectiveness. The paper thinks China's monetary policies from 1998 have not reached the expectation in general and China's deflation has not been solved to some degree, which causes the viewpoint of China's monetary policy ineffectiveness to occur. According to this viewpoint the paper analyzes three aspects: rate, demand elasticity of money and elasticity of rate. And then the paper arrives at the conclusion that China has not fallen into Liquidity Trap and monetary policy should have played its role. Accordingly, some other reasons but Liquidity Trap make monetary policy ineffective. The paper thinks that some restrictions in monetary policy transmission limit the effectiveness of monetary policy and explains these restrictions in details. Finally, the paper gives the optional policies and suggestions to improve monetary policy effectiveness: strengthen the monetary policy, lower further the loan rate, reserve rate and excess rate and reconstruct monetary policy transmission to launch the demand. At the same time, it is necessary to overcome the restrictions in China's monetary policy transmission.