The Study Of Chinese Monetary Policy And Exchange Rate Policy Coordination Under The Multi-objective Monetary Policy Framework Perspective

The monetary authorities of the countries around the world generally maintain price stability and financial stability as the main objective, at the same time, monetary policy focuses on price stability. "The law of People’s Bank of China" stipulates clearly that the goal of monetary policy is to maintain the stability of the value of currency and thereby promote economic growth. As a Developing country which is in the stage of transition, China not only has the missions of deepening reform and improving the mechanism, but also has the missions of maintaining reasonable growth of the economy and employment in the reform process, combined with the degree of market, monetary policy operations, and conduction mechanism are different from the developed economies and the high degree of market emerging market economies, the Chinese monetary authority implement the multi-objective of the monetary policy framework. In 2006, the IMF’s actual classification shows that China’s monetary policy framework has two nominal anchors, a monetary aggregate target, and a U.S. dollar exchange rate anchor. Of course, taking into account the stage of development of the Chinese economy and the characteristics of transition economy, the Chinese monetary authority will always be anti-inflation in a prominent position.From the theory and international experience, there will be certain difficulties for the monetary policy, which maintaining the multiple objectives. The difficulties come from the conflict between the policy objectives in the given set of circumstances. For example of China, in the context of a large number of foreign exchange funds into the territory and the existence of the expected appreciation of the RMB exchange rate, if the central bank doesn’t purchase more of foreign exchange assets, it will be harmful to the operation of financial institutions and development of the export-oriented sector, but the issuance of currency, which is to purchase of foreign exchange assets, will increase the inflationary pressures. The conflict between the objectives of monetary policy and the objectives of exchange rate policy brought a series of challenges to the China’s financial macro-control in recent years. Therefore, Chinese monetary authority needs the coordination between the monetary policy and exchange rate policy under the framework of the multi-objective, which is helpful to safeguard China’s internal and external stability and coordination, and create the a relatively stable monetary and financial order which is needed by balance the relationship among reform, development and stability.This paper attempts to choose the international macroeconomics, monetary policy theory and policy coordination theory as the theoretical basis and analysis methods of this research. Firstly, the paper set the classification of the monetary policy framework and exchange rate regime of International Monetary Fund’members, which is made by IMF, as the benchmark, watching the China’s multi-targeting monetary policy framework and managed floating exchange rate system regime. Then, it analyzed the relationship between the monetary policy and exchange rate policy, and revealed the internal relations between the multi-objective monetary policy framework and the uncoordinated policy objectives under certain conditions. The paper analyzed the mechanism of policy objectives prioritization to realize the monetary policy and exchange rate policy coordination by the theory of consumer choice. Meanwhile, It used of the means of historical review, theoretical analysis and summarized comparative method to analyzed the 1994 unification of exchange rates to July 2005 and after July 2005 the exchange rate formation mechanism reform to today two stages of the practice of monetary policy and exchange rate policy coordination by China’s monetary authority. It introduced the characteristics of policy coordination in the long-term and the short-term difficult issues.Then, this paper reviewed the history events, which the United Kingdom, Germany, Japan, China exit the fixed exchange rate system, steering the internal stability, in more than one century’s long history. It summarized the general cause of the large economies turn the external stabilization to internal stabilization. It reviewed the experiences of policy coordination Germany and the United States, and found the monetary authority should pay much attention to the inflation rate target and asset prices (thus, the general price level), and also take into account the currency excessive appreciation and deterioration of the current account. Especially in conjunction with the experience of the United States before the international financial crisis, it should put asset prices (or family wealth-income ratio) into the internal stability target, enrich and develop the content of the new policy coordination.Since then, this paper did simulation analysis of China’s monetary policy and exchange rate policy coordination by DSGE model. It found that the monetary policy which pegs the inflation target is better than the policy pegs exchange rate target to stabilize the macroeconomic variables in the sticky prices model, but If the excessive pursuit of low inflation target may lead to the volatility of the exchange rate. It means that the monetary authority needs to be stressed that the inflation target, and to take into account the exchange rate basically stable. At the same time, when home country is facing foreign monetary policy shocks, it has can take different monetary policy and exchange rate policy coordination ways to cope shielded from external shocks under different economic cycle.Based on the idea of prioritization of the policy objectives, international experience, policy simulation analysis, combined with the trend of more mature of China’s monetary policy control system, this paper tried to provide a new monetary policy and exchange rate policy coordination under the multi-targets. Thus, the original policy coordination mode that the U.S. dollar exchange rate anchor (main anchor) plus monetary aggregates target (secondary anchor) converts to the new policy coordination mode that the inflation target (main anchor) with composite exchange rate target (secondary anchor). U.S. dollar exchange rate anchor, which was in the main position, clear, precise nominal anchor, converted to a composite exchange rate anchor. The new exchange rate nominal anchor will be in a secondary position, implicit, not very accurate (only the basic stability) anchor. The goal of monetary aggregates, which was in a secondary position, not precise the nominal anchor, will convert the inflation target, which is a precise and main nominal anchor for the monetary authority. In the process of internal stability got much more attention, the Chinese monetary authority could get better internal stability (inflation) target, and take into account external stability (exchange rate)target through the new mode of policy coordination.Inaddition, the paper did empirical analvsis. It researched the impact of exchange rate policy on the inflation target. It found that the effective exchange rate appreciation could curb inflation, which helps to enhance the flexibility of monetary policy.Finally, based on the main conclusions, this paper provided some policy recommendations about monetary policy and exchange rate policy coordination in China from three aspects, from optimizing the target system of monetary policy and exchange rate policy, enhancing the capacity of the monetary policy and exchange rate policy coordination, and improving the supporting measures of coordination of monetary policy and exchange rate policy.