Analysis On China’s Monetary Policy Validity

The efficiency of monetary policy has long been the key point and difficulty in the field of economics.Before the establishment of the central bank system in China,the real meaning of monetary policy has not yet existed.In January 1984,after the people’s Bank of China exercised the functions of the central bank,the monetary policy in China was put into practice.In the past 30 years,the people’s Bank of China has used a variety of monetary policy tools to control the money supply in the economy,in order to achieve the goal of maintaining price stability and economic growth.Although monetary policy has achieved good economic effect,it brought some problems,such as the limitations of money supply controlled by monetary authorities,limitations of monetary policy instruments,liquidity trap and other issues,which makes the effect of monetary policy in a certain period of poor performance.This issue has attracted the attention of monetary authorities and economists,and a large number of qualitative and quantitative studies have emerged.The results of the research are combined of the micro economics and macro economics theory as well as the theory system of macro regulation of monetary policy,and provided useful references for the government to formulate policies.Compared to the research on the effect of monetary policy,mostly confined to the structural equation model(SEM),a dynamic stochastic general equilibrium model(DSGE),vector autoregressive model(VAR)and structural vector autoregressive model(SVAR)and other research methods.It is seldom used to study the effect of monetary policy by VAR model with sign restrictions.This method does not constrain parameters but the impact effect to itself and provides a new perspective for the study of the effect of monetary policy.Firstly,our research will try to explore the China’s monetary policy validity in two aspects—monetarism school and fiscal policy,describe the different periods of the economic effects of monetary policy.Secondly,in order to investigate the effect of monetary policy,we will use the VAR model with sign restrictions which has been used in Andrew Mountford and Harald Uhlig(2008).We apply the method to China quarterly date from 1997-2015.The empirical result shows that,the adjustment of monetary policy to the economy is effective,but when the monetary authorities adopt monetary policy to control the economy,the problem of monetary policy and the time lag of monetary policy are the key to the effectiveness of monetary policy.The time lag of monetary policy will exacerbate financial instability,in addition,the ultimate goal of monetary policy and the selection of monetary policy tools also exist defects,so we should establish a macro prudential regulatory policy framework to make up for the defects of monetary policy and achieve the goal of financial stability.Thirdly,this paper analyzes the relationship between monetary policy and macro prudential supervision policy.Finally,this paper proposes to establish the financial system counter-cyclical regulation,and gradually improves the macro prudential regulatory frameworks,It is of great practical significance for China’s financial stability to control the financial risk in a controllable range.