Macroeconomic Policy Choices Under Open Economic Environment

With the deepening of economic globalization, the world economy is growing at an alarming rate closely linked together, while the interaction and coordination of national macroeconomic policies are also increasingly deepened. Economic powers, especially the international influence which is brought by the United States monetary policy is more and more obvious. The impact of the U.S. economic shocks is affecting other countries to a more intense shock wave at any time. After the 1980s, under the influence of the transmission mechanism of US monetary policy, the global economy appeared serious imbalance, the financial crisis broke out frequently, so that the whole world was involved in the financial tsunami. Imbalances of global economic structure to a considerable extent depends on the dollar credit standard system after the collapse of Bretton Woods system, since the collapse of the Bretton Woods system in 1973, the dollar replaced gold as the world’s main reserve assets completely, a credit dollar as the core of the monetary system formed.After the dollar standard system get rid of gold, the external rigid constraints of the dollar supply will disappear completely, which seeks a way out for the U.S. economic stagnation and the growing budget deficit to provide conditions, contributed to the long-term U.S. quantitative easing monetary policy and debt monetization, results not only leads to the flood of global dollar and inflation in the world, but also brings great impact to the dollar inflows country’s economic development. China, as the U.S. dollar continued net inflow country, its economic development and structural change is facing a serious challenge to the United States and U.S. dollar factor. Facing increasingly complex external environment, how should we scan the possible impact to China’s further development and economic structure changes from the strategy, and how we should take appropriate response measures are related to the major theory and practical issues about the future direction and prospect of Chinese economy.The paper summarizes and evaluates the theoretical development of Mundell-Fleming Model firstly, it indicates that as the basic framework of the current macroeconomic analysis, the structure of M-F model exists significant deficiencies, including the inconsistencies of model extensions logic, the non-uniformity of model structure and the ambiguous about the balance of international payments. Then according to the completeness of the market classification and the consistency of the model structure, it proposes IS-LM extended model under the open economy conditions, and uses the extended model as the theoretical framework of this study. Next it abstracts complex external environment and U.S. economic factors as the dollar infinite supply elasticity, uses the open economy macroeconomic model, and combines with the assumption of the dollar infinite supply elasticity, demonstrates the dollar continued quantitative easing impact on China’s economic development and structure, the influence on the different types of national economic running from the external shocks and foreign impact, China’s macroeconomic policy choices and policy implementation risks and the effects of fiscal policy tools effectiveness from the theoretical and empirical arguments respectively. It draws the following conclusions:1.The dollar credit expansion will bring China’s economic structure virtualization, and form a dual economy pattern including a relatively developed virtual economy and shrinking real economy. And then, empirical results show that the increase in the amount of U.S. money supply has positive impact on the proportion of the virtual economy both in the short term or in the long term, that is to say, the proportion of the virtual economy raises under the influence of the U.S. money supply expansion, and its short-term impact effect is greater than the long-term. In addition, the proportion of virtual economy shows significant trend under the impact of dollar credit expansion.2.Under the dollar infinite supply elasticity, the impact of the external interest rate shocks and expected exchange rate shocks on the economic powers is uncertain. Whether the two impact will have effects on major economy and how the effects depend not only on the value of the various macroeconomic parameters, but also on the structural parameters of the corresponding. However, compared to the external interest rate shocks, the effects of expected exchange rate shocks on large country economy will more complex and uncertainty. The empirical results obtain that the external interest rate shocks and exchange rate shocks have positive impacts on China’s economy, but the shock effects show significant differences before and after China’s currency reform. Compared with the previous stage, after the exchange reform, the U.S. federal funds rate shocks on China’s economy has weakened, while the U.S. dollar against the yuan one-year period forward exchange rate shocks on China’s economy has enhanced.3.Under the dollar infinite supply elasticity, whether fiscal policy or monetary policy, the implementation effect of policies are uncertain owing to the diversity of policy transmission paths. Fiscal policy and monetary policy is effective or not, and how the effects of policies depend on the value of the macroeconomic parameters, the relationships among different parameters not only determine the degree of the different policies effects, and even determine the direction of policies effects, When the direction of the policies effects contrary with the target of macro-control efforts, the policies not only can’t play a role in stabilizing the economy, but also increase economic fluctuations. However, compared to the monetary policy, the implementation effect of fiscal policy is much simpler, at least to ensure that will not make the economic situation worse, it determines that the selection of fiscal policy to control the macroeconomic running is superior to monetary policy. The empirical results show that since the reform and opening up, China’s macro-control policies in general is effective, but after joining the WTO, the implementation effects of the macroeconomic policies are different in the stage before joining the WTO. Specifically, before joining the WTO stage, the implementation effect of monetary policy is more obvious, and the implementation risk of monetary policy will be less than fiscal policy; after joining the WTO stage, the implementation effect of fiscal policy enhanced significantly, monetary policy becomes a purely passive adjustment tool, and at the same time, the risk of fiscal policy reduces, while the risk of monetary policy enhances, that is, in the current economic environment, the dominance of fiscal policy and monetary policy is reversed, China should focus on fiscal policy of macroeconomic regulation.4.Under the dollar infinite supply elasticity, the implementation effects of government spending policy and tax policy are also uncertain, both of them depend on the relevant macroeconomic parameter values. But By comparison, regardless of the dollar is by virtue of a single channel or dual channel infinite inflow, the implementation effect of tax policy is always greater than the effect of government spending, namely the implementation of tax policy impact on the national economy more obviously. Meanwhile, empirical analysis shows that government spending and tax revenues have impact on our economy both in the short-term and the long-term, but the impact effects of them are opposite. Increasing government spending will promote economic growth, while raising taxes will inhibit economic growth, and both of them will gradually weaken with the extension of time. However, the implementation effect of tax policy is always greater than government spending. In addition, the impact of government spending on investment is only effective in the short term, and it presents alternating positive and negative effects, and long-term effect disappears; government spending on private consumption always has negative influence. While tax revenues for investment and private consumption are produced negative impact effects.