"A Drop in the Ocean"or"Offer Fuel in Snowy Weather"——Research on the Effectiveness of Monetary Policy in a Low Interest Rate Environment
Affected by the internal environment of insufficient domestic demand and the complex external environment,China's monetary policy will remain at a low interest rate.However,it is worth discussing the effect of monetary policy imple-mentation in a low interest rate environment.The People's Bank of China lowered the 7-day reverse repurchase and medium-term lending facility interest rates twice in June and August 2023,exceeding market expectations.The purpose is to guide the market interest rate to moderately decline,and then stimulate market demand.China's interest rate level is already at a his-torical low.In this context,it is worth discussing whether monetary policy,as an important means of macroeconomic regula-tion,can still achieve the expected effects.Scholars have not yet reached a consensus on the effectiveness of monetary policy during periods of low interest rates.Most research focuses on developed economies,with limited discussion on the effects of China's monetary policy during peri-ods of low interest rates.However,China's low interest rate situation is different from other countries,so it is urgent and realis-tic to discuss this issue.In addition,compared with vector autoregressive(VAR)models,local projection(LP)models have multiple advantages such as flexible model settings,robust estimation results,and small measurement errors.However,the lo-cal projection model has not yet been applied to the study of asymmetric effects of monetary policy.Firstly,this paper constructs a theoretical framework to systematically analyze the mechanism of monetary policy during the periods of high and low interest rates.Then the state-dependent local projection model is used to quantitatively analyze the time-varying effects of monetary policy under different periods.The key findings can be summarized as follows:(1)China's expansionary monetary policy shocks can effectively increase output in both high and low interest rate periods,pro-ducing the expected regulatory effects.(2)China has not fallen into the"liquidity trap".The effects of expansionary monetary policy shocks on output,investment and consumption will be enhanced during periods of low interest rates.Monetary policy can indeed play a role in providing timely assistance.Conventional monetary policy can still effectively stimulate consumption and investment willingness,thereby boosting aggregate demand.(3)High leverage enhances the response of output and in-vestment to expansionary monetary policy shocks but weakens the response of consumption in a low interest rate environment.High leverage encourages enterprises to reduce the funds used to alleviate daily operations and increase the funds used for long-term investment.High leverage also increases residential real estate investment and enhances liquidity constraints,thereby crowding out residential consumption.The conclusions of the paper put forward constructive suggestions for optimiz-ing the effectiveness of monetary policy and enhancing the transmission effect of monetary policy.
Low Interest RatesNonlinear Local ProjectionState-DependentMonetary Policy Transmission Mechanism
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