Research Gaps, Contributions and Implications

China uses the quantity-based direct instruments and the price-based indirect instruments to promote economic growth and price stability, as well as stimulate the development of the stock market and the tourism market. Furthermore, Japan was the first developed country to use the unconventional monetary policy to control the adverse effects of the prolonged recession. Overall, the contributions of this thesis are that we use the appropriate research design to shed light on the effects of monetary policy in different transmission mechanisms on the macroeconomy, financial market, and tourism market.

1.6.1 Gaps and Contributions of Effectiveness of China’s monetary policy on the economy:

Evidence from FAVAR model

China’s economy has experienced significant reforms and opening-up. The monetary instruments used by the People’s Bank of China are more diversified. However, there is no consensus on the effectiveness of China’s monetary policy on the economy (Lyv, 2005; Goodfriend & Prasad, 2006;

Mehrotra, 2007; Geiger, 2008). Most existing literature focuses on one type of monetary instrument in the People’s Bank of China to analyse its effects on the real economy or price level (Mehrotra, 2007; Cheung & Chinn, 2008). Furthermore, the literature is biased towards assessing the effectiveness of China’s monetary policy before the 2008 financial crisis (Lyv, 2005; Qin, Duo, Quising, He, & Liu, 2005). Moreover, there is very limited evidence on the dynamic effects of China’s monetary policy on the economy, particularly regarding the structural changes of China’s monetary policy in different time periods (Dickinson & Liu, 2007; Sun, Ford, & Dickinson, 2010).

This chapter addresses the above-mentioned void by considering simultaneously both quantity-based direct instruments and price-quantity-based indirect instruments, as they evaluate their effectiveness on China’s economy from January 2002 to December 2016. To avoid an arbitrary choice, I divide a large set of macroeconomic variables into several groups and extract factors for capturing the key characteristics of China’s economy, the price level and monetary policy. A further advantage

44 | P a g e of utilizing the FAVAR model in two sub-samples is that it can capture the dynamic effectiveness of China’s monetary policy on the economy.

This study makes three major contributions to the extant literature. First, it finds that monetary policy in general has positive effects on China’s economy. Second, it shows that the effectiveness of China’s monetary policy on the economy is limited to the quantity-based direct monetary instruments that were introduced in 2002. Third, it evaluates the dynamic effectiveness of China’s monetary policy on the economy following the global financial crisis of 2008/2009. These research findings also have important policy implications. One policy recommendation is to improve the marketization degree of the price-based indirect monetary instruments due to their proven ineffectiveness. On the other hand, the People’s Bank of China should employ innovative monetary policy instruments to stimulate economic growth and safeguard economic stability in China.

1.6.2 Gaps and Contributions of Asymmetric effects of China’s monetary policy on the stock market: Evidence from Nonlinear VAR model

Over the last three decades, China has undergone significant reforms to open up the economy.

China’s monetary policy, economy, and stock market have experienced development. After reviewing the existing literature, it could be found that there are some gaps in the research. First, the relevant literature is rather discordant on the asymmetric effects of monetary policy on the stock market. For example, Chen (2007) suggests the presence of asymmetric effects of monetary policy on the stock market. By contrast, Lobo (2000), Hu and Guo (2012) argue that the asymmetric effects of monetary policy on the stock market are not significant. Second, a strand of research focuses on the asymmetric effects of monetary policy on the stock market in the developed economies (Bernanke & Kuttner, 2005; Andersen et al. 2007; Basistha & Kurov, 2008;

Chuliá et al. 2010). Third, a large body of literature cannot identify the effects of monetary policy on the stock market in the bull market and bear market. Some people argue that the effects of monetary policy on the stock market are larger in a bear market than in a bull market (Chen, 2007;

Chulia et al., 2010; Jasen & Tsai, 2010). Moreover, China’s stock market is policy dependent. The effects of monetary policy in a bull market and a bear market are not clear. Building on these gaps, this chapter discusses the theoretical framework, and outlines and estimates a Markov switching vector auto-regression model to analyse the asymmetric effects of China’s monetary policy on the stock market.

45 | P a g e This chapter makes three contributions to the extant literature. Firstly, this chapter uses the MS-VAR model to shed light on the asymmetric effects of monetary policy on the stock market.

Second, to the best of my knowledge, this is the first study which empirically certificates there is a certain degree of the dichotomy between China's stock market with the real economy. Third, this chapter shows that the effects of China’s monetary policy are stronger in a bull market than in a bear market. The research findings have important research implication. This chapter can theoretically analyse the information response capacity of the stock market under different market operation stages. This chapter tests the specific impact of different monetary policy’s instruments on the stock market. The results of this research can be used to formulate policy advice for improving the effects of monetary control on the stock market.

1.6.3 Gaps and Contributions of Effects of China’s monetary policy on tourism market development: Evidence from FAVAR model

China’s monetary policy, economy, and tourism market have all experienced development.

However, in reviewing the existing literature, there are some gaps in the research. First, analysis of monetary policy and the tourism market, the link between the two is not clear (Liu & Yan, 2012;

Samirkaş and Samirkaş, 2015; Ridderstaat & Croes, 2017). Thus, the results of these studies are not sufficiently reliable for analysis of the relationship between monetary policy and the tourism market. Moreover, the related literature only focuses on tourism demand to analyse the effects of monetary policy on development of the tourism market (Liu & Yan, 2012; Samirkaş and Samirkaş, 2015; Ridderstaat & Croes, 2017). However, tourism demand cannot represent the entire tourism market. Finally, the related literature only uses one of the monetary policy channels to analyse the effects of monetary policy on tourism market development (Liu & Yan, 2012; Ridderstaat & Croes, 2017). The use of only one monetary policy channel cannot sufficiently represent the effects of monetary policy on the tourism market. This study fills the abovementioned void by simultaneously considering the money supply channel, interest rate channel, exchange rate channel and other assets channel when analysing the effects of China’s monetary policy on the tourism market from 2004 to 2016.

This study makes three contributions to the literature. First, to the best of my knowledge, this is the first study to empirically explore the relationships among monetary policy, macroeconomics, and the tourism market in China. Second, this study is the first to attempt to analyse the effects of monetary policy in four transmission mechanism channels on China’s tourism market

46 | P a g e development. Third, unlike other related studies, which have used only one or two variables, this study explores the effectiveness of monetary policy by introducing four transmission mechanism channels. This study has the following research implications. First, it provides significant insights into the continued study of the effects of monetary policy on the tourism market. Second, it shows that the interest rate channel cannot effectively affect China’s macroeconomy and tourism market.

This study can also provide feasibility analysis for future researchers to deeply explore the relationship between the interest rate channel and China’s tourism market. Third, this study strongly shows that China’s monetary policy is effective for the economy. Thus, this study is undoubtedly necessary for an understanding of this domain.

1.6.4 Gaps and Contributions of Financial and Macroeconomic effects of Japan’s unconventional monetary policy: New evidence from a structural factor-augmented MS-VAR approach

Japan has employed unconventional monetary policy for more than 15 years. The effects of Japan’s unconventional monetary policy on the economy and the financial market are complex. The review of the related literature helps identify several gaps. First, there is no consensus on the macroeconomic effects of Bank of Japan’s unconventional monetary policy (Kimura, 2003; Okina and Shiratsuka, 2004a; Kiyotaki and Moore, 2012). Ueda (2000) shows that the first round of quantitative easing in Japan succeeded in bringing long-term interest rates to low levels, thereby supporting economic recovery. However, Bernanke et al (2004) report that Japan’s deflation persisted but short-term interest rates remained very low over a prolonged period. As a result, the effects of quantitative easing on the economy and the price level are not clear. Second, existing literature focuses on one round of Japan’s unconventional monetary policy (Bernanke, Reinhart, and Sack, 2004; Ugai, 2007; Kiyohiko, 2009; Lam, 2011; Fukuda, 2014; Hausman and Wieland, 2014). Third, existing literature has different views on each round of Japan’s unconventional monetary policy. To reconcile these views, the macroeconomic and financial variables will be divided into several groups, and factors will be extracted from different groups. Similarly, this study will identify unconventional monetary policy indicators. After all, unconventional monetary policy in Japan cannot be represented by only one or two variables. Specifically, this study will combine the indicators of Japan’s unconventional monetary policy in a Markov switching VAR model to study the effects on the economy and financial market. I identify two regimes in this research, which in differ in the extent to which unconventional monetary policy is effective.

47 | P a g e This chapter makes three contributions to the literature. First, prominent in this research is the complexity of Japan's unconventional monetary policy. In order to address the complexity of monetary policy, this study uses the principal component analysis to estimate the monetary policy indicator, and draws a roadmap of unconventional monetary policy from March 2001 to March 2016. Second, whilst other studies only used one or two variables, this study uses a broad range of variables (e.g., variables that characterize the price level and the housing market) to better represent Japan’s economy. Third, this study finds that Japan’s unconventional monetary policy can effectively ease the deflation. This study has the following research implications. First of all, this study provides insights into further study of the effects of unconventional monetary policy in the different regimes. Second, this study shows that the real estate market does not significantly respond to Japan’s unconventional monetary policy.

Overall, this thesis uses quantitative techniques to evaluate the macroeconomic and financial effects of China’s monetary policy and Japan’s unconventional monetary policy.