The Research On The Monetary Policy Transmission Channel And The Choice Of The Intermediary Targets Of The Monetary Policy In China

As an important part of monetary policy framework, intermediary targets should provide effective information for the central bank to make proper monetary policy. As a result, in order to realize ultimate targets of monetary policy successfully, it is essential to choose appropriate intermediary targets which could reflect objectively the economic situation and the effects of monetary policy in practice. Since the adoption of monetary supply as the intermediary target in 1996 in China, whether monetary supply is an appropriate intermediary target has been widely discussed in the academia, as it becomes less and less controllable and measurable, besides, the velocity and the multiplier of money also fluctuate. Some scholars advocate that the position of money supply as the intermediary target should be maintained, while others propose that interest rate or exchange rate be targeted as the intermediary target.The validity of an economic variable to be set as the intermediary target consists that whether it can reflect objectively the economic situation and the effects of monetary policy in practice, and it should be easily controlled and measured. It is required that the transmission channel of monetary policy should be effective, so that the central bank can affect the intermediary target via monetary policy instruments and thus affect the ultimate targets successfully. This dissertation aims to discuss the validity of money supply, interest rate and exchange as the intermediary target of monetary policy based on the transmission channel from both theoretical and empirical aspects.This dissertation starts from the transmission channel of the monetary policy and elaborates the theory and related factors, as well as the types of channels and their uncertainty, analyses the complications of the transmission channel under the present economic circumstances in China. For the money supply as the intermediary target, I discuss the neutrality and non-neutrality of money, the latter of which is one of the preconditions for the validity of money supply to be the intermediary target. I also present the theoretical research situation on money supply as the intermediary target in China as well as the influence on the inflation and the output, analyse the transmission channel of the money supply and prove that it can still be considered to serve as the intermediary target of monetary policy through empirical test. For the interest rate as the intermediary target, I retrospect the history of the interest rate as the intermediary target and analyse the movement of intere rate in China through extended Taylor rule. The result obtained indicates that Taylor rule can serve as a good prediction tool for market interest rate and the transmission channel of interest rate is effective, which implies that the interest rate can be employed as the intermediary target of moentary policy with priority. I also present the process of interest rate marketization in China. For the exchange rate as the intermediary target, I compare the real exchange rate regime with the exchange rate target zone from the theoretical aspect, and examine the effect of exchange rate on the international trade and inflation between countries through empirical test. The result signifies that the exchange rate does not fit for the intermediary target for the moment in China. At last, I discuss the feasibility of a final target regime—inflation targeting in China, and I propose that it is essential for China to adopt a reasonable intermediary taret to help the central bank to setup appropriate monetary policy. Thus, I propose that China adopt a dual intermediary targets regime with the interest rate as the main one and the money supply as the surbodinate one. While the exchange rate cannot reflect objectively the structure of the international trade, it should not be taken as the intermediary target.