Research On The Effects Of Monetary Policy Based On Dual Economy

As the reform in market economic system and financing structure has deepened,the macroeconomic regulatory and control system in China is improving. As one of themost important of way of macroeconomic control, monetary policy is playingmomentous role in keeping sustainable and healthy development in national economicgross and maintaining basic stability of the price in China. Monetary policy in Chinaaims at the unified regulation of national economy, which means implementing thesame management in different areas and industries. The effectiveness of its expectationeffects requires a relatively balanced domestic development. However, since China isone of the developing countries, the dual economic structure constitutes the basiccharacteristic of its economy. The dual economic structure here implies the coexist ofthe agricultural sector with traditional methods of production, low labor productivity,low income and the industry sector with modern methods of production, higher laborproductivity, higher income. The conflict between the total control of monetary policyby central bank and the economy with dual structure characteristic in China is bound toexist, resulting in the differences in effects of the monetary policy.This paper starting from the basic theories of monetary policy and dual economydiscusses the problems of the differences in effects of monetary policy transmitted todual economy in reality. After analyzing the status quo of dual economy of China thisdissertation investigates the outcome and the reason of the differences in effects of themonetary policy from two angles: the income effect and the price effect. The empiricalanalysis part in this article tests the relationship between monetary policy index andincome effect&price effect from urban area and rural area. The first step is to estimatea money supply equation. With this equation we can calculate two time series datarepresenting the expansionary and tight monetary policy. The second step is to use thehistorical data and the two series data to Vector Autoregressive Model empiricalanalysis, then to analyze with impulse response function. The empirical results showthat the effectiveness of monetary policy between urban and rural areas is significantlydifferent from the income angle, while it is almost same effect from the price angle.Besides, the effect of expansionary monetary policy is significantly more than the tightmonetary policy whether from the income or price angle for dual economy in China. The reason for this outcome is the existence of a huge gap in financial developmentlevel between urban&rural areas and the agricultural production income rate is low. Inhope of promoting the efficiency of monetary policy in China and eliminating the dualeconomy, suggestions including improving the rural financial system and enhancingflexibility in the control of monetary policy are put forward at the end of the article.