The Effectiveness Of Price-based And Quantity-based Monetary Policy In China On The Basis Of Liquidity Fluctuation

The economy in China has entered a highly-developed stage since the Reformingand Opening Policy is adopted. Now, China has replaced Japan to be the second-largesteconomy in the world. However, many problems are also followed with the furtherimplementation of the Reforming and Opening Policy, such as the imperfect marketsystem, unbalanced economic structure and the severe volatility on macro liquidity.Among the above, the last problem was particularly obvious. China’s economy hasundergone excess liquidity crunch and conversion of liquidity a lot during1997to2013,which makes a big difficulty for the Central Bank to formulate and implement themonetary policy. Under the influence of the liquidity fluctuation, the choice and effectonmonetary policy become acommon focus for Central Bank in every country.This paper introduces the background of liquidity fluctuation when theeffectiveness of monetary policy is observed, which aims to provide valuable policysuggestions for the Central Bank to formulate and implement monetary policy and avoideffect onliquidity fluctuations.In this paper,the basic concepts and theories on liquidity fluctuations and monetarypolicy are first introduced and the main points of the effectiveness on monetary policyare summarized. Then, depending on the former base, starting from the two stages ofthe conduction on monetary policy, theoretical analysis is made on quantity and pricemonetary policy under the background of liquidity fluctuations; two group of models onVAR are established, and the influences on intermediary conduction index and theultimate goal between monetary policy on quantity and price are compared under thebackground of liquidity fluctuations and a final conclusion can be made. The empiricalresults show that the effectiveness on price-based monetary policy has increased underthe background of liquidity fluctuations, which demonstrates that in recent yearsChina’s interest rate liberation has a initial result; under the background of liquidityfluctuations, transmission channels on monetary policy has been affected a lot, and it isreluctant to accept the results on the influence of final goals made by two kinds ofmonetary policies; liquidity fluctuation will result in the growth of a lag and the increaseof the uncertainty on monetary policy; under the background of liquidity fluctuations,Monetary policy is more favorable for the large-scale enterprises, and is easy to produceagreaternegative impact onsmall and medium sizedenterprises. In the end, this paper put forward some policy suggestions according to theconclusions on theoretical analysis and empirical research. The Central Bank shouldmake improvements on the transmission channel of monetary policy, reduction themonetary policy transmission delay and management liquidity fluctuation and theformulation on favored-policies for small and medium sized enterprises in order topromote the effectiveness on monetary policy and ensure the healthy and stableoperation of macro economy.