Summary:
Over the past few decades, there have been frequent global and regional economic crises. As fluctuations in economic cycles accelerate, it is becoming difficult for central banks' current behavior rules to effectively achieve counter-cyclical goals. This raises the need for more monetary policy innovations. In the past, Taylor's monetary policy rule has been successfully applied in Western countries, but it has weak applicability in China. For some periods, it cannot smooth economic fluctuations while also playing a pro-cyclical role. In addition, although discretionary monetary policy itself plays a strong role in economic stability, it may cause the problem of dynamic inconsistency. It cannot smooth economic fluctuations, but it may also play a pro-cyclical role. It can be seen that the design of a monetary policy with both regular and discretionary components has important reference significance for central banks' counter-cyclical regulations. In this paper, we carry out a pertinent design and construct a regime-switching Taylor rule. However, unlike previous research, this paper internalizes Markov regime transformation probability and makes it time-varying. In addition, considering that the main discretionary monetary policy tools are money supply, open market operations, and deposit reserve ratios, we make the Markov regime transformation probability time-varying depending on the monetary base, credit of the banking system, exchange rate, and deposit reserve ratio. In this way, we construct a Markov regime-switching Taylor rule with time-varying transition probabilities. In this monetary policy, time-varying Markov regime transition probability is the key link. First, it links the Taylor rule to determine the regime in which it can play the role of an automatic stabilizer. Second, it links the discretionary monetary policy tools so that monetary policy no longer uses interest rates as a direct operational tool but as an intermediate target. In the meantime, the method of responding to inflation gaps and output gaps for interest rates under different regional systems indirectly changes with the money base, credit level of the banking system, exchange rate, and deposit reserve ratio. In addition, these direct operating tools can also achieve a counter-cyclical function as a discretionary monetary policy. The study finds that there is an asymmetric effect for the automatic stabilizer function of the rule component in the monetary policy. In regime one, there is no automatic stabilizer function in the rule component; in regime two, there is a favorable automatic stabilizer function in the rule component. In addition, it is found that low average interest rates are the reason why the monetary policy in regime one does not have automatic stabilizer function; the zero-interest-rate problem limits the central bank's ability to regulate the macro economy through short-term nominal interest rates. In regime one, the volatility of short-term nominal interest rates is small, which also illustrates the central bank's lower intervention in interest rates. The situation is the opposite in regime two, which explains why the monetary policy in regime two has a strong automatic stabilizer function. Based on the analysis results, the monetary policy designed in this paper gives rise to the following operation modes. During recessions, the central bank should use the money base and window guidance as the direct operation tools, and take nominal short-term interest rates as the intermediate target. On one hand, when the economy is in a downturn, increasing the money base growth rate and loosening the window guidance has an anti-cyclical function, which can warm up the economy; on the other hand, it can guide the economic system to switch to the regime where the rule component has a favorable automatic stabilizer function, thus producing a positive and dynamic regulating effect between short-term nominal interest rates and inflation and output. During boom periods, the central bank should use exchange rates and deposit reserve ratios as the direct operation tools, and take nominal short-term interest rates as the intermediate target. Raising the exchange rate and deposit reserve ratio has an anti-cyclical function, which can cool down the economy. It can also guide the economic system to switch to the regime where the rule component has a favorable automatic stabilizer function, thus producing a positive and dynamic regulating effect between short-term nominal interest rates and inflation and output.
彭洋, 张龙, 吴莉昀. 时变概率的区制转换泰勒规则设计及其“稳定器”作用机制研究[J]. 金融研究, 2019, 469(7): 19-37.
PENG Yang, ZHANG Long, WU Liyun. Design for Markov Switching Taylor Rule with Time Varying Transition Probabilities and Study of the Mechanism of Stabilizer Function. Journal of Financial Research, 2019, 469(7): 19-37.
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