Dissertation > Economic > Economic planning and management > Economic calculation, economic and mathematical methods > Economic and mathematical methods

Robust Monetary Policy and Stability of the Macroeconomic Fluctuation in China

Author HeFangFang
Tutor JinChengXiao
School Jilin University
Course Quantitative Economics
Keywords Robust monetary policy DSGE model Exogenous shock Economic fluctuation
CLC F224
Type Master's thesis
Year 2012
Downloads 304
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Currently, the complexity and uncertainty of international economy and financecondition rise, moreover, the unbalanced, uncoordinated and unsustainablecontradictions and problems in the domestic economy development are stillprominent, and new situation, new changes may still emerge. With the pressure ofcoexistence of downward economic growth and upward inflation, to maintaineconomic development smooth and rapid and keep the general price stable, thePeople’s Bank of China said recently, the central bank will continue to implementrobust monetary policy in2012. To the relationship between monetary policy andmacroeconomic fluctuation, previous scholars have conducted thorough andcomprehensive discussion, but they usually use the traditional econometric methodssuch as regression analysis, the Granger causality test, and co-integration test. Inaddition, there are also some researchers have made evaluation and analysis on theeffect and role of the implementation of robust monetary policy in China. But there isstill not too much research on the relationship between the robust monetary policyand macroeconomic fluctuations. As all above, this article investigates the effect ofrobust monetary policy on macroeconomic fluctuations using dynamic stochasticgeneral equilibrium (DSGE) model, and thus could provide theoretical support for thecentral bank’s monetary policy choices.According to Chinese macro economy following robust monetary policy since1999, this article establishes a dynamic stochastic general equilibrium modelincluding monetary policy shock, preference shock, technology shock, wage bonusshock and price bonus shock. At the same time, it introduces a same DSGE modelwhich abandons the monetary policy shock to compare with the original model.Having estimated and solved the two models, we simulate our macro economy usingthe two models and do further analysis. We get the following conclusions: Firstly, comparison between the DSGE model simulation data, which containsmonetary policy shock, and the real economic data shows that the DSGE modelcontains five exogenous shocks can better describe our macro economy since1999when the robust monetary policy was proposed.Secondly, the impulse response figures of each main macroeconomic variabledisturbed by the monetary policy shocks reveal that money supply shocks affect themacro economy mainly via investment, and money supply shocks affect the realeconomic variables such as output, consumption, employment and wage evidently inshort term, but the long-term effects is not obvious. What is more, monetary shocksdo affect inflation significantly. It means that monetary policy regulation do havecertain effect on macro economy, taking appropriate policy can decrease fluctuationeffectively and make the economy more stable.Thirdly, by comparing the DSGE model economy including the interference ofmonetary policy shock with the DSGE model economy excluding the monetarypolicy shock, as well as comparing the impulse response figures of the mainmacroeconomic variables facing same equal exogenous shocks in the two DSGEmodels, such as preference shock, technology shock, wage bonus shock and pricebonus shock, we find that our robust monetary policy can deal with the interferenceof various exogenous shocks effectively and reduce the fluctuation of the maineconomic variables significantly, stabilizing the macroeconomic fluctuation to someextent, although it almost has no effect on the time fluctuation last.In summary, the robust monetary policy regulation our governmentimplemented can bring down the macroeconomic fluctuation and is helpful to realizethe goal of keeping the economy running smoothly, so China should continue toimplement the robust monetary policy.

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