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The role of money and monetary policy of the central bank in pursuing macroeconomic stability has significantly changed over the period since the end of World War II. Globalization, liberalization, integration, and transition processes generally shaped the crucial milestones of the macroeconomic development and substantial features of economic policy and its framework in Europe. Policy-driven changes together with variety of exogenous shocks significantly affected the key features of macroeconomic environment on the European continent that fashioned the framework and design of monetary policies.

This chapter examines the key basis of the central bank’s monetary policy on its way to pursue and preserve the internal and external stability of the purchasing power of money. Substantial elements of the monetary policy like objectives and strategies are not only generally introduced but also critically discussed according to their accuracy, suitability, and reliability in the changing macroeconomic conditions. Brief overview of the Eurozone common monetary policy milestones and the past Eastern bloc countries’ experience with a variety of exchange rate regimes provides interesting empirical evidence on origins and implications of vital changes in the monetary policy conduction in Europe and the Eurozone.

Since monetary policy has great economic impacts, before the policy implementation, careful simulation combined with real economy movement condition can predict the policy implementation effect and reduce the cost of monetary policy implementation effectively. The paper aims to discuss these issues.

This paper selects the large commercial banks in China as the research objects, takes commercial bank capital adequacy requirement as the threshold constraint on the traditional monetary policy transmission path, and simulates the implementation effects of policy combination by applying computer technology.

It shows that the threshold effect of capital restriction policy will affect the transmission path of monetary policy, suppress the collective irrational behavior caused by the profit maximization behavior of commercial banks, and control the excessive fluctuation of macro economy.

If using capital adequacy constraints threshold function scientifically and appropriately, the paper can effectively eliminate the negative effect of short-term traditional monetary policy transmission mechanism, control the macroeconomic overall risk within a predetermined range, and realize the goal of monetary policy with low cost.

Based on the theory of credit rationing from Stigliz and Weiss, combining threshold factors of capital restraint policy with the traditional monetary policy transmission path, this paper examines that the policy combination may lead to the implementation effect. The method of simulation used in this paper has not been found in other literatures, and the results have strong implications to set up a reasonable and scientific macro-prudential banking regulation framework.

To verify the effectiveness of the monetary policy, the impacts of monetary instruments on overnight spread under the interest rate corridor (IRC) are examined. The People's Bank of China (PBC) has operated the IRC since 2014. To understand the impacts of monetary instruments on overnight spread before and after the IRC framework, the complete samples are divided into two periods.

To model the overnight spread, an exponential GARCH (EGARCH) approach is used which can examine the interbank market interest rates for monetary policy purposes. The overnight money market plays an important role in the implementation of monetary policy.

Chinese interest rate liberalization and the implementation of IRC affect the overnight spread in the short-term financing market. Before the implementation of the IRC, the key factor to affect the overnight spread is mainly affected by the PBC's monetary policy control on the liquidity supply side. After the implementation of IRC, the overnight spread can be the largest part explained by the liquidity demand side and the PBC's multiple monetary instruments have significant impacts on the reduction of overnight spread.

The overnight spread has recently been influenced by various factors that are directly or closely related to the monetary policy instruments and the interest rate policy of the PBC. Chinese interest rate liberalization and the implementation of interest rate corridor policy affect the overnight spread in the short-term financing market.

We analyze the impact of monetary policy instruments on interbank lending rates and retail bank lending in China using an extended version of the model developed by Porter and Xu (2009). Unlike the central banks of advanced economies, the People’s Bank of China (PBoC) uses changes in the required reserve ratios and open market operations to influence liquidity in money markets and adjusts the regulated deposit and lending rates and loan targets to intervene in the retail deposit and lending market. These interventions prevent the interbank lending rate from signaling monetary policy stance and transmitting the effect of policy to the growth of bank loans. Since the global financial crisis, the PBoC’s monetary policy has gone through a full cycle. The combining effects of using different policy instruments simultaneously within a short period of time were quite effective in bringing the credit and money growth in line with its desired level. Most recently steps have been taken to speed up the interest rate liberalization. Effective July 2013, the PBoC removed the floors of the benchmark lending rates.