Confidence Accelerator,Macroeconomic Fluctuations and Monetary Policy Effectiveness
In the face of low consumer confidence and increasing economic pressure,policymakers have attached greater importance to promoting economic recovery and development by boosting confidence.A deeper understanding of the role of confidence in macroeconomic fluctuations and monetary policy regulation is essential for policy authorities to effectively boost confidence and achieve economic stability.Existing studies mainly focus on the impact of confidence on the macroeconomy and the effect of macroeconomic policies,but less on the analysis of the impact mechanism of confi-dence and how policy should respond.Additionally,they mainly use time series models like vector autoregressive models but pay relatively less attention to structural macro models.Therefore,more exploration is needed to understand how to build a theoretical framework featuring with confidence.To understand how confidence affects the macroeconomy and macroeconomic policy effectiveness,this paper con-structs a dynamic stochastic general equilibrium model containing confidence,credit constraints,and zero lower bound.On this basis,this paper calibrates the model and conducts numerical simulation experiments.The main findings are as follows.First,pessimistic confidence shocks behave like negative demand shocks,leading to a downward spiral in aggre-gate output and the price level.Second,confidence amplifies macroeconomic fluctuations and we label this effect as a"confidence accelerator".In the baseline scenario,the"confidence accelerator"amplifies the effects of recessionary shocks by an additional 30 percent.This is because recessionary shocks will lead to a decrease in output that dampens households'confidence,leading to a further decline in consumption and thus additional pressure on aggregate output.Third,the"confidence accelerator"can significantly reduce the effectiveness of monetary policy when policy strength is not sufficiently strong.In the baseline scenario,the"confidence accelerator"would reduce the growth stabilizing effect of a 25-basis point cut in nominal interest rate by 50 percent.Fourth,a"confidence accelerator"would make it easier for the economy to trigger the zero lower bound trap,resulting in a prolonged recession.Finally,implementing more aggres-sive monetary policies and forward guidance can help prevent the economy from entering the zero lower bound and pro-mote economic recovery.The findings of this paper have several important policy implications.First of all,if the economic downturn is ac-companied by a substantial decline in confidence,increasing the strength of monetary policy will improve the policy ef-fectiveness by boosting households'confidence.Second,the implementation of forward guidance and expectation man-agement can help alleviate the dilemma of insufficient space for monetary policies.With the decline in the required re-serve ratio and nominal interest rates,the People's Bank of China should pay more attention to forward guidance.Lastly,since confidence is affected by the consistency of policy orientation of macro policies and enhancing the consistency of policy orientation can boost the coincidence,policymakers should consider the effects on confidence when evaluating the consistency of policy orientation.Compared to the existing literature,the proposed"confidence accelerator"demonstrates three-fold contributions.First,we provide a new perspective on understanding the effects of"confidence accelerator"in shaping the macro-economy,and explain the dilemmas of low confidence,economic downturn,and reduced effectiveness of China's mon-etary policies in recent years.Second,by constructing a non-linear dynamic stochastic general equilibrium model and solving the model using the non-linear method,our paper is able to capture the non-linear effects of confidence shocks and hence generate the"confidence accelerator",shedding new light on the effects of confidence.Third,we revisit the positive role of monetary policy in coping with low confidence and economic downturn by experimenting with our non-linear dynamic stochastic general equilibrium model,and provide a theoretical foundation for policymakers to enhance policy strength and implement forward guidance.
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维普
