Summary:
In recent years, the Chinese economy has been shifting from rapid growth to high-quality development. In this situation, monetary policy should adopt aggregated and structural regulations to keep liquidity at an adequate level and to help the real economy. With the rapid development of Chinese financial innovation and financial disintermediation, the effects of quantity regulation (which controls the money supply as the intermediate goal) are decreasing. In particular, Chinese interest rate marketization has entered a new stage, where the core feature is a mechanism for the formation and control of market-oriented interest rates. Monetary policy should now be transformed from quantity-based regulation to price-based regulation. The regulation of quantity and price are interactive processes. It is necessary to maintain the balance between quantity and price. In the transformation of China's monetary policy, the combination of quantity and price regulation has played a vital role in stabilizing economic growth and inflation. A lot of studies have shown that purely quantity-regulating rules such as the McCallum rule, or purely interest rate-regulating rules such as the Taylor rule cannot fully explain China's monetary policy. Therefore, it is important to study the relationship between monetary rules regarding both quantity and price, and to explore a quantity-price admixed monetary policy. Such an admixed rule policy can help us to comprehensively understand Chinese monetary policy regulation during transformation. In this study, we construct our model based on the Fisher equation and the money-in-the-utility model. We analyze the relationship between the monetary quantity rule and the price rule, and construct a quantity-price admixed monetary policy rule. It is of great theoretical and practical importance for interpreting the regulation of China's monetary policy. On one hand, the admixed monetary policy rule verifies the equivalence of the quantity rule and the price rule. When output deviates from potential output, or inflation deviates from the inflation target, we can regulate these imbalances through either interest rate instruments or currency instruments. Quantitative instruments and interest rate instruments complement each other. At the same time, when the currency deviates from the target level, we can also regulate the problem through interest rate instruments. When the interest rate deviates from the natural rate, we can use currency instruments. However, in terms of practice, the quantity and price of money are equivalent as two sides of a coin, so that the money supply and the market interest rate both have important roles in monetary regulation. The admixed monetary policy rule is important for analyzing the typical issues that arise during the transformation of China's monetary policy regulations. We make some inferences based on our admixed monetary policy. First, we find that under equilibrium conditions, the directions of quantity regulation and of interest rate regulation are opposite. If the interest rate is lower than the natural interest rate's level, then the actual growth rate of the money supply will be greater than the optimal growth rate. This inference explains the fact that although our interest rate is controlled at low levels, and our money supply exceeds the potential level, the Chinese economy has not experienced severe inflation. Second, we construct a modified Taylor principle that is suitable for China's monetary policy. With the admixed quantity-price rule, when the money supply's rate of growth exceeds the potential level, the adjustment of interest rates can be less than the change of the inflation rate, and the prices can also be stable. This inference explains why the standard Taylor principle is not established in China. Therefore, with a distorted interest rate, we can also achieve price stability. Third, we analyze the liquidity effect in China. We find that with the admixed rule, if the growth rate of the money supply is smaller than the optimal level, the interest rate's fluctuation will be larger than that indicated by the principle Taylor rule. However, when the money supply's rate of growth is higher than the optimal level, the interest rate will be stable. This inference explains the fluctuations of interest rate with the changes to the liquidity conditions, and especially the growing fluctuations of interest rates seen since 2011. The study's empirical analysis verifies the assumptions of our model and our inferences. It is urgent to transform our monetary policy from a quantity-based to a price-based system of regulation. In the future, the central bank should further improve open market operation and develop innovative liquidity management tools, so as to effectively regulate the interest rates, thereby creating a favorable financial environment for high-quality development of the Chinese economy.
李宏瑾, 苏乃芳. 数量规则还是利率规则？——我国转型时期量价混合型货币规则的理论基础[J]. 金融研究, 2020, 484(10): 38-54.
LI Hongjin, SU Naifang. Quantity Rule or Price Rule: Theoretical Foundation of the Admixed Monetary Rule in China's Transition Period. Journal of Financial Research, 2020, 484(10): 38-54.
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