Research On The Cost Channel Of Monetary Policy In China

There have been many theoretical models and empirical examinations based on these models derived by many economists in various fields to discover the transmission channels of monetary policy on the real economy. However, under the framework of traditional Keynesian, the analysis of monetary policy usually pay much attention to the effect on aggregate demand, and ignore the influence on aggregate supply in a long time. In fact, besides the basic effect on aggregate demand, monetary policy also has influence on inflation and aggregate output in the way of aggregate supply effect caused by cost channel. For example, tightening monetary policy often leads to price increase not decrease by the supply effect, and the ignorance of this will harm the economic development. As a result, it’s very meaningful to study the cost channel of monetary policy and the reflection of optimal monetary policy rule in China, not only in the theory field, but also in the reality field.This paper combines theoretical analysis methods with empirical analysis methods to study whether the cost channel of monetary policy exists and the effect of aggregate supply on optimal monetary policy rule. Firstly, this paper reviews the current related researches at home and abroad, and summarizes the optimal monetary policy rule theories and studies on optimal monetary policy on condition of cost channel effect. Then, based on the conclusions of micro-enterprises theoretical models, we conduct an empirical test on the existence of cost channel effect in China by using the sub-sector data of listed companies from 1999 to 2014. At last, this paper makes an AS-AD model in condition of cost channel and optimize the utility function of the central bank based on the framework of neo-Keynesian to get the optimal monetary policy rule. Furthermore, this paper discusses the optimal monetary policy based on the monetary policy experience to analyze the influence of cost channel effect on central bank’s optimal monetary policy.The main conclusions of this paper are as followed:the empirical analysis results reflect that the supply side effect of monetary policy can’t be ignored in China. Considering the supply side effect and demand side effect on inflation, the validity of central bank’s monetary policy decreases, this means it should be very cautious for the central bank to choose monetary policy. Meantime, we also find that firms of different ownerships faces different cost constraints and different effect levels of cost channel, cost channel effect of non-stated ownership firms are more significant. Besides, cost channel effect has changed the constraint condition of optimal monetary policy rule. No matter the central bank chooses doing by rule or discretion, there’ll be a dilemma between inflation and output gap while facing an exogenous shock, as the endogeneity of cost channel has increased the inflation level. At last, cost channel decreases the validity of optimal monetary policy, which leads to a greater loss of social welfare.