Study On The Effectiveness Of Monetary Policy Influenced By The Investment Behavior Of Local Government

As an important measure for the central government to control macro-economy andmeet the set objective, monetary policy depends on not only efficient conductionmechanism, but also the active cooperation of micro units, such as local governments,banks, enterprises and consumers. But in reality, micro units, which involve in themonetary policy transmission, pursue their maximum interests, so the result of theirbehavior maybe inconsistent with the set objective of monetary policy, leading lowefficiency of monetary policy.Taking local government as a research object, this thesisanalyzes the influences of investment behavior for the sake of their pursuit for maximuminterests on the effectiveness of monetary policy, which has important theoretical andpractical significance to improve the effectiveness of monetary policy.This thesis firstly sorts out the domestic and international research literature aboutlocating the function of local government, the relationship between local governmentinvestment and economic growth, and the relationship between local governmentinvestment and the effectiveness of monetary policy.Secondly, according to the localgovernment’s behavior theory and reality in our country, it analyzes the meaning of thelocal government investment,the cause and influence factors of the investment.In addition,it analyzes the responsiveness of local governments’ investment behavior to the monetarypolicy through the interest rates and credit conduction channels, and researches how thelocal government investment affects the total output and price, and ultimately impacts onthe effectiveness of monetary policy.Finally, it tests the impact of local governmentinvestment to the validity of monetary policy by a couple of six variables VAR modelestablished from the economic data in China.Through the study, this thesis concludes that changes in monetary policy will causechanges in the investment behavior of the local government, the influence in descendingorder of different monetary policy tools is money supply, credit scale, interestrates,Relative to expansionary monetary policy, the local government investment to thesensitivity of the deflating monetary policy is not strong. Data shows that Chinese localgovernment investment is increasing rapidly, its growths directly contributes to regionaleconomic growth, and promotes the growth of local enterprise investment and householdconsumption, which cause the growth of total local output, but also lead to inflation, andultimately reduce the effectiveness of monetary policy. In the end, the thesis presents policy-recommendations to standardize the investment behavior of local government, andthen transmit monetary policy more effectively, including the optimization of financialdecentralization and the revenue-sharing system, improvement of performance examinesystem, optimization of financial expenditure structure, strengthening the supervision oflocal governments, and improving the monetary policy conduction efficiency of localgovernment.The innovation of this thesis is that it assumes the local government to be aneconomic man pursuing maximum interests in the region, and test the currenteffectiveness of monetary policy by local government investment in our country.