The Reserch Of Chinese Monetary Policy Effectiveness Based On TVP-favar Model

Monetary policy is one of the most important tools for government to developeconomic, to stable the price and to adjust macro-economy, so the research on theeffectiveness of monetary policy has a long history and has important theoretical andpractical significance. In the traditional study of effectiveness of monetary policy, theresearchers use policy variable and one or two or three macro-economic variables toestablish the VAR model, to find out a one-to-one relationship between the policy andmacroeconomic variables. Due to a few macroeconomic variables cannot fully reflectthe overall development of the macro economic, one-to-one relationship can’t reflectthe overall policy variables on the macroeconomic development. It’s needed toincrease the number of macro-economic variables in order to get completeinformation of the development of economy. Because of the limitation of the VARmodel, when the dimension of model is high, the degree of freedom consumptsseverely, so the model needs a large amount of data as support. The release frequencyof macro-economic variables in China is mainly month, season or year, so it’s difficultfor the researchers to obtain enough data. In order to fully reflect the overallrelationship between monetary and macroeconomic development situation, and toovercome high degrees of freedom excessive consumption and shortage of data, thisdissertation choose factor-augmented VAR model (FAVAR) as a basic model, selecteight macroeconomic variables, use principal component analysis to extract twofactors, which can represent the situation of macro-economic development and thenchoose three monetary policy variables, money supply, exchange rates, interest rates,and use each of the policy variables and macro-economic factors to establish FAVARmodel, to find out the relationship between every policy variables and themacro-economic factors.In recent years, in order to adapt to the macroeconomic development direction ofthe future, China has been committed to the monetary policy reform and optimization.These reform measures play an important role on our country’s economy development,also make a large extent influence on the effectiveness of monetary policy in ourcountry. However, the constant coefficient of FAVAR model can’t depict thetime-varying effectiveness of China’s monetary policy. In order to depict the changingprocess, FAVAR model coefficient must be modified, so based on the FAVAR modelthis dissertation adopts the time-varying parameters (TVP-FAVAR) to depict that the same monetary policy could have different effects on macro-economic during thedifferent periods of time. It highlights the effect of China’s monetary policy reform,and portrays the different period of reform on the specific role of economicdevelopment. This dissertation found that China’s monetary policy is valid in general,but choose different monetary policy variables will lead to the different effectivenessof monetary policy, even choose the same variables of monetary policy will also leadto the different effectiveness in different periods because of the different ways ofreform, different reform process and different international and domestic situation.The effect of monetary policy which choose money supply as the policy variable isbecoming weak, and the monetary efficiency level has been continuously reduced.Exchange rate adjustment has played a larger role in improving the monetary policyeffectiveness after the new exchange rate regime of exchange rate system reform inour country. However, the low level of interest rate liberalization makes theeffectiveness of monetary policy weakened.