Dynamic Regulation Of The Effects Of Chinese Monetary Policy

All along, the monetary policy is an important means of macroeconomic control,which mainly by adjusting the money supply, interest rate and the supply of credit inthe economy, in order to iron out fluctuations in the economic cycle, maintainingmacroeconomic economy running smoothly, and then reaching the counter-cyclicalmacro-control expansion purposes. With further promote of China’s economic reform,the corresponding changes in the international economic situation, monetary policyinstruments and their corresponding transmission mechanism also reflects thecomplexity and time-varying feature. In the face of macroeconomic "new normal"situation, based on the previous studies on the monetary policy, the establishment ofappropriate macroeconomic policy modelunder different macro-economic backgroundand the study of different regulatory effects of monetary policy and its time-varyingcharacteristics are necessary. The study is not only able to fill the current gaps inresearch for monetary policy, but also give reasonable opinions and suggestions in thefuture development and implementation of monetary policy.This paper first analyzes the static McCallumRule in China as wellas the applicationof the Taylor rule respectively. Monetary policy is the basis for the implementation ofmonetary policy rule of a country. It is necessary to analyze rules of monetary policybefore proceeding to the effect of monetary policy. We found that the regulation of thequantity of money is mainly pegged output gap, while the interest rate adjustment ismainly for inflation gap. In the process of the implementation of monetary policy,currency and interest rate have different emphases. Accordingly, we will mainly studythe impact of money supply on output and focus on the regulation of interest rates oninflation in the rest part of the paper.Then we changed traditional VAR model by adding a dynamic factor and time-varying parameter into TVP-FAVAR model. The coefficient of the model, as well assimultaneous relations are time-varying covariance matrix so that the model has a highdegreeofflexibilitywiththeabilityto obtaineconomicstructuralchanges intheprocessof time-varying characteristics. And on this basis we have introduced dynamic factors into the model which obtain the macro-economic and social background information.In this way we will add additional flexibility and information which were ignored byprevious studies to the research. Analysis and results of the model are morecomprehensive and sensitive in recognizing changes in the economic structure.On this basis, the paper established a Chinese macroeconomic factor models. We useM2growth and the improvement of inter-bank as the monetary policy tools variablesin order to estimate and analyze the money supply and interest rates Dynamic effectson macroeconomic regulation. Results of the analysis show that:(1) China’s monetarypolicy has significant variability to economic growth and inflation, whether it is themeans or the interest rate means the quantity of money.(2) M2growth rate has apositive effect in influencing economic growth and inflation. And the effect has beenvery significant. But the strength of the effects varied with the changes of the economicsituations.(3) Regulation Effect interest rates on economic growth and inflation have areverse. Rising interest rates will curb economic growth and reduce prices. Theintensityofadjustment willchange withdifferent economic situation.(4)Theregulationof interest rates has a significant time-varying effect on influencing output, specifically:theeconomiccrisis in2009and thesubsequent recoveryperiod, interest rates’influenceon economic growth is significant. In2011, a normal period and in2014the "newnormal" period, the interest rates’ influence on output results decreased significantly.(5) The regulation of interest rates on inflation rate also has obvious time-varyingfeather, which affect the results in the three periods are very significant. But theadjusting strengths in the different economic situations differ. The impact of interestrates to inflation during the economic crisis was most significant and the impact duringthe period of "a soft landing" was most insignificant. While the impact in the "newnormal" period was between them. And at any point in time, interest rates are aneffective tool to adjust the price level.