Macroeconomic effects of asymmetric monetary policy intervention to asset price volatility in China: simulation and analysis based on a piecewise linear NK-DSGE model
(2.School of Economics and Management of Xidian University 710061)
【Abstract】Asymmetrically intervening to asset price volatility is a common monetary policy practice conducted by central banks of major economies around the world. However, there has not been enough attention to its macroeconomic effects and potential risks; nor to say they are not fully explored academically. This paper incorporates China’s central bank’s asymmetric monetary policy intervention to asset price volatility, namely preemptive easing, into a general equilibrium framework to construct a piecewise linear New Keynesian dynamic stochastic general equilibrium model, and investigates the macroeconomic effects and potential financial risks of the asymmetric monetary policy intervention using a piecewise linear solution tool (OccBin) and the numerical simulation techniques. This research finds that, the asymmetric monetary policy intervention to asset price volatility would exacerbate the non-linearity and asymmetry of the economy to some extent, but has little effect on promoting economic prosperity or dampening recessions. Conversely, it would lead the interest rate to stay below its equilibrium level for a long time. Therefore, the asymmetric monetary policy intervention to asset price volatility might be a major source of endogenous financial risks, inducing resource misallocations and severe financial imbalances. This finding is consistent with the economic reality during the Great Moderation period before the 2008 financial crisis. Based on numerical simulation and comparison, this research also suggests that a transition of monetary policy intervention to asset price volatility from the asymmetric model to the symmetric model could reduce these aforementioned risks. These research results are of great significance to the amelioration of the monetary policy in China and to the avoidance of pitfalls like the US subprime mortgage crisis.
【Keywords】 asset price volatility; asymmetric monetary policy; macroeconomic effects; piecewise linear New Keynesian dynamic stochastic general equilibrium model;
. ① In the 2002 Economic Symposium hosted in Jackson Hole, Wyoming, the former Chairman of the US Federal Reserve Alan Greenspan proposed a guidance for monetary policy to react to the asset price bubbles. This proposal was later named “Jackson Hole Consensus.” [^Back]
. ① Please refer to the classic literature, such as Calvo  and Bernanke et al., for detailed derivation procedures. The detailed information is also available on request. [^Back]
. ① Since we have assumed an implicit financial intermediary in the model, and the demand for credit from the entrepreneur sector is decided by the marginal products and marginal costs of capital, the amount the household sector lends does not necessarily equal to the exact amount that the entrepreneur sector borrows. Under the assumption of an implicit financial intermediary, the credit market is also cleared; this is consistent with the discussion in Christensen and Dib. [^Back]
. ② Due to the space limitation, we do not list them here. The detailed information is available on request. [^Back]
. ① In existing literature on DSGE, the dataset is normally detrended with two-sided HP filter. However, there are problems with this practice. The two-sided HP filter uses the future data for the smoothing process, which conflicts with the backward-looking character of the state space in the DSGE models. From this point of view, it is more proper to use the one-sided HP filter. [^Back]
. ② For the assumptions about prior distribution (particularly the prior means for the coefficients in the interest rate rule), He et al., Wang et al., and Shu and Liu  are consulted. Note that, though some empirical studies have pointed out that the elasticity of PBC’s monetary instrument’s response to inflationary gap is less than 1, we set the value of elasticity to 1.1. Our main considerations are as follows. First, it is to ensure that the DSGE model can achieve a stable solution. Second, it is the decision after we consult the calibration and estimation results in the existing DSGE literature in China. Third, it is to avoid confliction with the empirical research result that China’s monetary policy responds to inflation insufficiently. [^Back]
. ③ The parameter κqA does not fall in the reference regime and thus cannot be calculated simply by a weighting. Intuitively, the value obtained through Bayesian estimation should be below the actual value of the parameters for according to the theoretical model, the central bank will not intervene in the asset price when the asset price is on the rise. Hence, on average, the effect from monetary policy to the asset price will be weakened. Therefore, to be cautious, we set the value of κqA to be slightly higher than its Bayesian estimate in the alternative regime. [^Back]
. ① Since the standard deviation of the interest rate shock is quite small, the differences between two intervention models are not quite significant. [^Back]
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