Keywords IS-LM double stable monetary policy and fiscal policy econometric model
In recent years, especially before 2002, China tends to implement a proactive fiscal policy in macro-control, increase infrastructure investment, expand government expenditure, and stimulate economic growth. This was in line with the economic growth rate and economic situation in China at that time.
However, since 2003, the economic situation began to change. In 2003, the GDP growth rate of China reached 9.3%, and in 2004, the GDP reached 13.7 trillion yuan, an increase of 9.5%. Under this change, China implemented a proactive fiscal policy for seven years and began to withdraw in 2005. In order to curb potential inflation, prevent overheating and ensure economic stability, China implemented a prudent monetary policy and a prudent fiscal policy in 2005. That is, the "double stability" of monetary policy and fiscal policy. The author intends to discuss this "bi-stable" macroeconomic policy from the IS-LM curve.
Firstly, briefly review the IS-LM theory.
IS-LM model was founded in 1937 by British economist Hicks, winner of the Nobel Prize in Economics. This model describes the horizontal relationship between interest rate and national income on the basis of Keynesian interest rate mechanism.
IS and LM curves represent the combination of interest rate and national income level when commodity market and money market are balanced respectively. IS curve describes the inverse relationship between interest rate and national income when the commodity market is balanced, I refers to investment and S refers to savings; LM curve describes the positive correlation between interest rate and national income when the money market is balanced, where L refers to liquidity preference and M refers to money stock.
When the IS or LM curve moves, the equilibrium income and the equilibrium interest rate will change. Fiscal policy and monetary policy can promote economic growth and increase national income by pushing IS or LM curve to the right. The relationship between the shape of IS-LM curve and fiscal policy and monetary policy is as follows:
Expansionary fiscal policy increases spontaneous expenditure, which leads to the increase of aggregate demand and balanced income through multiplier effect, thus pushing the IS curve to the right. The flatter the LM curve, the more effective the fiscal policy; Influenced by the crowding-out effect, the relationship between the shape of IS curve and the effectiveness of fiscal policy is uncertain.
The active monetary policy increases the money supply by means of statutory reserve, rediscount and open market business, and pushes the LM curve to the right. The flatter the curve, the more effective the monetary policy; The flatter the LM curve, the more effective the fiscal policy is.
Second, the study of China's IS-LM curve.
1. Some views on the shape of IS-LM curve in China
There are different views and debates in theoretical circles about the shape of China IS-LM curve, and even whether there is a fitting IS-LM curve in China. One view IS that there is an overall inverse relationship between investment and interest rate in China, and the IS curve is inclined from left to right in the normal range, with a small slope and a steep trend; There is also an overall inverse relationship between money demand and interest rate in China. The LM curve falls in the normal range of classical interval and Keynesian interval, and the trend is very steep. The interest rate elasticity of money demand IS less than that of investment demand, so the trend of LM curve is steeper than that of IS curve. According to the basic framework of China IS-LM model, both IS and LM curves are within the normal range, and the slope of IS curve is greater than that of LM curve (Zeng Xianjiu, 200 1). Another view is that due to the special money supply and interest rate changes in China, the inclination of LM curve in China is upward, which is contrary to the classical theory (Hu Haiou, 200 1). There IS also a view that China's low and imperfect market and the elasticity of investment interest rate make the IS curve a steep curve inclined to the upper left, while the LM curve is very unstable (Ren Taizeng, 2000; Li Shu, Cao Dan, 2002), there is another view that the lack of constancy of parameters in China IS-LM model shows that frequent changes in the system will increase the uncertainty of the role of macroeconomic policies, so that we cannot use it to accurately calculate the impact of macroeconomic policies on variables of concern (Si Chunlin et al., 2002).
2. Qualitative analysis of China IS-LM curve model.
The slope of IS curve depends on the interest rate elasticity of investment and the multiplier A (or marginal propensity to consume C) of spontaneous expenditure. Other things being equal, the greater the interest rate elasticity of investment, the flatter the IS curve. Similarly, the greater the multiplier of spontaneous expenditure (or the greater the marginal propensity to consume), the flatter the IS curve.
In China, interest rate can be regarded as a policy variable, which is formulated and regulated by the decision-making department according to the needs of market changes and economic development. The interest rate elasticity of investment reflects the sensitivity of enterprises and individuals to changes in their financing costs. Due to institutional reasons, state-owned enterprises in China play a decisive role in economic life, while due to the protection of policies, state-owned enterprises are relatively slow to respond to changes in market interest rates. In contrast, SMEs are relatively sensitive to interest rates from the perspective of financing costs. The increase of money supply, the decrease of deposits and the increase of interest rate will increase the financing cost burden of small and medium-sized enterprises, urge them to reduce their investment and make them weak in competitiveness and be eliminated. From this perspective, the interest rate elasticity of SME investment is greater.
In terms of marginal propensity to consume, the marginal propensity to consume of low-and middle-income groups is still small, which corresponds to the greater marginal propensity to save. Due to the imperfection of China's social security system, the huge demand for education, the expansion of education expenditure and the influence of traditional consumption habits, residents' savings demand is at a high level. Of course, the marginal propensity to consume of the middle and high income class is relatively large, because with the opening of the market, the change of consumption behavior and habits, the rise of credit consumption, the marginal consumption ability and willingness of the middle and high income class have improved, so this part of the propensity to consume coefficient is larger, that is, the multiplier is larger.
Therefore, from the qualitative analysis, China's is curve should be a slightly steep curve. With the development of economy, the improvement of system and the improvement of people's living standards, this curve tends to be flat.
The slope of LM curve depends on the interest rate elasticity of money demand and the income elasticity of money demand, and there is a trade-off relationship between these two demands. That is, the greater the interest rate elasticity of money demand, the smaller the income elasticity of money demand, and the flatter the LM curve. Preventive money demand is basically inelastic to interest rates. In China, this part of the demand for money shows the expectation of medical care, old-age security and children's education, and this part of the demand will not change because of the general changes in interest rates. With the development of the securities market and the expansion of investment channels, the sensitivity of speculative money demand is increasing. At present, in China's imperfect securities market, residents have a certain sense of investment, but the funds available for investment are limited, and the investment channels are limited, which is reflected in the LM curve and lacks flexibility.
Therefore, qualitatively, China's LM curve is also a slightly steeper curve. With the improvement of the securities market, the expansion of investment channels and the standardization of investment behavior, this curve tends to be flat.
3. Quantitative analysis of China IS-LM model.
Since 1990, the data of China's GDP, interest rate and real money supply over the years are as follows:
Year Y P G I M 1 M 1/P
1990 18547.9 103. 1 547.39 9.72 6950.7 674 1.707 1
199 1 2 16 17.8 103.4 559.62 8.64 8633.3 8349.4 197
1992 26638. 1 106.4 555.9 7.56 1 173 1.5 1 1025.846
1993 34634.4 1 14.7 59 1.93 10.98 16280.4 14 193.897
1994 46759.4 124. 1 639.72 10.98 20540.7 1655 1.733
1995 58478. 1 1 17. 1 789.22 10.98 23987. 1 20484.287
1996 67884.6 108.3 907.44 9. 18 285 14.8 26329.455
1997 74462.6 102.8 10 19.5 7.47 34826.3 33877.724
1998 78345.2 99.2 1387.74 5.67 1 1204.2 1 1294.557
1999 82067.5 98.6 2 1 16.57 4.59 13455.5 13646.552
2000 89468. 1 100.4 2094.89 3.02 14652.7 14594.323
200 1 973 14.8 100.7 25 10.64 2.25 15688.8 15579.742
2002 105 172.3 99.2 3 142.98 1.98 17278.0 174 17.339
2003 1 173 10.6 10 1.2 3429.3 1.98 19746.0 195 1 1.858
The data come from China Statistical Yearbook 2004, China Market Statistical Yearbook 2004 and China Industrial Economic Statistical Yearbook 2004.
At the same time of qualitative analysis, the author uses econometric model to regression IS-LM curve.
IS curve: the equation is set as y = a+ci, the data is selected as 1990-2003, and the regression equation is y =119231.9-8236.684i after being modified by Cochrane-Orcutt two-stage iterative method.
T value: (11.47590) (-6.005028)
R value is 0.7503 14.
F value: 36.06036
DW value: 2.493770
LM curve, the equation is set as: Y=a+bM/P+ci, the data is selected as 1990-2003, and the regression equation is: y = 85921.36-7554.322i+1.88438+08m.
T value (7.384292) (-7.176627) (3.646)
R value: 0.855320
F value: 32.5 1499.
D-W value: 1.55438+076.
The goodness of fit of the two equations, the significance of variables and the significance of equations can all pass the test, and the DW value can basically pass the test.
Through the regression results of this econometric model, the shape of China IS-LM curve is inferred, and the conclusion is quite unexpected. First of all, the coefficient value of I in the two equations IS large, and the reaction is on the curve, which is a flat IS and LM curve. Secondly, the slope of interest rate I in LM curve IS also negative, which shows that both IS and LM curves in China are flat curves with upward inclination. This result is inconsistent with the qualitative analysis of China's economic reality. The author analyzes the reasons. First, the model design is relatively simple, and the regression results are far from the economic reality. Second, the interest rate in China is not marketized, and the interest rate in the model is actually playing a role as a policy variable, which cannot reflect the economic reality.
Thirdly, analyze the "double-robust" policy from the IS-LM model.
1, the policy meaning of "bistability"
As early as 2003, the Economic Situation Analysis Group of China Macro Research Institute put forward the viewpoint of "double stability" in "Economic Situation Analysis in 2003 and Prospect in 2004", but it was not put into practice in 2004.
"Double prudent" fiscal policy and monetary policy are essentially neutral macroeconomic policies in the sense of economics. The so-called "neutral" macroeconomic policy, compared with the expansionary policy and the contractive policy, is a policy of maintaining pressure, tightening and shrinking, fine-tuning up and down, and moderate tightness (Liu Guoguang, 2004). Personally, I think "stability" is neutral, and it tends to be tight compared with "positive", especially from the perspective of rational expectation, which reflects the psychological expectation of the public. This policy adjustment reflects the changes in China's economic situation and the overall macro-policy attitude that emerged at the historic moment. Although prudent policy is not equal to austerity, in the expectation of economic subjects, "prudent" is similar to austerity to some extent.
2. The focus of China's "double stability" policy
The focus of the "double stability" policy is economic stability, not economic growth. The IS-LM model discusses the horizontal relationship between national income and interest rate level, but does not discuss economic stability. As a macroeconomic policy, "double prudence" policy is more concerned with preventing overheating, promoting social equity and reducing unemployment rate, adjusting industry structure and coping with economic monopoly. This policy aims at economic stability by analyzing the speed of economic development and various economic indicators, and is committed to finding a balance between overheating and slow growth.
3. "Double stability" policy should strengthen market supervision.
The IS-LM model in China has no definite shape, so it cannot be accurately fitted by quantitative analysis. Because interest rates are not marketized, some variables are actually policy-oriented, and there are many insurmountable obstacles in qualitative analysis, which can not accurately describe the shape of IS-LM curve. Therefore, with the change of economic situation, China's IS-LM model (I regard it as a qualitative model with some conditions in classical theory) is inaccurate. Although the long-term trend is clear, in the short term, or in a certain period, the shape and trend of the model are not accurately defined.
Under the imprecise IS-LM model, a stable policy, that is, a neutral policy, should be said to match this imprecision well. Because a prudent policy means prudence of government intervention, leaving more room for market development, and realizing the double equilibrium of commodity market and money market through the perfection of market mechanism and the elimination of market forces, China's IS and LM curves tend to be normal from theoretical rigor and stable from practical inaccuracy through market cultivation.
The "double prudence" policy is a more cautious policy choice. While ensuring the steady economic growth, this policy should pay more attention to the coordination of all aspects of economic development, pay attention to providing public products, and solve market failures such as externalities. On this basis, we should carefully implement other supporting government intervention measures, strengthen the cultivation of the market, guide the improvement of the market, make the market regulation more sensitive and powerful, and thus promote the market economy more effective.
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