The Frontiers of Cointegration Theory and Recommendations for the Countercyclical Adjustment of Monetary Policies
This study provides an interpretation of cointegration theory,emphasiz-ing its practical application and significance within the context of China's economy.It outlines potential avenues for applying cointegration theory to investigate China's economic problems.The research commences with an intuitive display of the defini-tion of cointegration through simulated datasets.And then,this paper interpreted the Engle-Granger two-step cointegration test's evolution and its empirical applications in analyzing China's capital market.Subsequent to this foundational analysis,the paper delves into the vector error correction model(VECM)as a manifestation of the Granger cointegration framework.Acknowledging the tendency of China's macroe-conomic and financial data to reflect structural changes in deterministic trends,this study examines the applicability of cointegration tests under such conditions and suggests appropriate methodologies to address these complexities.Furthermore,the article advances discussions on the extended theories of cointegration,focusing on the analysis of permanent shocks and their long-term trend decomposition.It also inves-tigates the decomposition of dependent cycles,applying these theoretical expansions to assess the implications on China's currency,inflation rates,and prices of agricul-tural products.The study proposes several recommendations for the countercyclical adjustment of monetary policies.It predicts that with certain monetary conditions—specifically a 15.0%growth rate in the M2 money supply and RMB loan balances,a dependent cyclical component of M2 at approximately 1.1,and a consumer price index(CPI)increase to around 2.5%—China could sustain a 6%GDP growth in 2024 and 2025.This projection is based on the historical impact of the 2002-2003 monetary policy easing,which yielded a 1.35%GDP growth due to a surge in the short-and medium-term GDP trend components.Furthermore,in order to shed new lights on the application of the frontier theory about co-integration in China,this paper proposed a series of research insights,aiming to inspire rigorous empirical eco-nomic research and foster theoretical innovation in China.
cointegration testspermanent shockspermanent shock effects on China's GDPdependence cyclesdependence cycles between currency and inflation of China
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