Theory And Empirical Studies On Monetary Policy Rules In Open Economy

In this paper, based on the current domestic and international situation, we did a series studiesof the design, selection and operation of Chinese monetary policy rules. This article made literaturereview and appropriately arranged chapters from seven aspects, including the introduction ofDSGE model, welfare point of optimal monetary policy rules, operational tools of monetarypolicy rules, the central bank balance sheets and the operation of monetary policy rules, two-pillarof monetary policy rule actions, financial stability and monetary policy rule actions, the dynamiccharacteristics of the monetary policy rules.Before empirical analysis, this article introduced the monetary policy rules practice course ofChina and the major capitalist countries, then described the relevant theory of monetary policyrules and the requirements of optimal monetary policy rules. We built a basic framework of optimalmonetary policy rules in a New Keynesian framework in China, which laid the basis of theoreticalmodels for the later chapters.This article studied several monetary policy rule reaction functions in the basic framework ofthe open economy, which are taylor rule, monetary growth target rule, the expected inflationtargeting rule and simple exchange rate target rule. By introduced exchange rate into thecentral bank loss function, we compared the welfare effects of different monetary policy rulesfunction, trying to find the monetary policy rule which can make the minimum social welfare loss,then make further study of its nature. The results showed that, money growth target rule made thesmallest welfare loss. In the four monetary policy rule action fuctions, money growth targeting ruleis the relatively optimal rule. Money supply growth rate variable cansignificantly reduce the valueof the welfare loss in the monetary policy rule.In order to research the changes of the welfare loss,we allowed the weight of each variable in the social loss function changing corresponding to themoney growth rate target rule. The results showed that, when the coefficients of the inflation gapand the money supply growth rate gap three times the coefficient of the output gap, social welfarecan get some improvement. With the weights of variables in the welfare loss function changing,weestimated the welfare loss changing path of the optimal monetary policy rules. The results showedthat, exchange rate stability factor needs to be considered in the formulation of monetary policy.Giving a appropriate exchange rate weight in the objective function can improve social welfare, buttoo much attention to exchange rate stability target would undermine the level of social welfare.From the financial crisis, the central bank balance sheet becomes to be a good perspective tostudy the monetary policy. Therefore, this article introduced the central bank balance sheet and itscapabilities responsing to crisis, and interpreted the balance sheet asset and liabilities of ThePeople's Bank of China. This article also introduced the monetary policy control how to influence the balance sheets and which balance sheet items may be affected by monetary policy. On this basis,we constructed unconventional monetary policy rule models, using Bayesian methods to estimate.We calculated impulse response function of the major subjects in balance sheet such as foreignexchange assets, currency issue, financial corporation deposits, changing in central bank bills. Wefound that, the foreign currency assets is mainly affected by the impact of output growth andinterest rates, reserve requirement ratio and other financial institutions deposit can offset a smallportion of the growth of foreign exchange assets. Other financial institutions deposit gets thegreatest impact from exchange rate and reserve requirement ratio. Volume of currency issued iseffected by the foreign exchange assets and monetary supply. Financial corporations deposits getsthe greatest effected by reserve requirement ratio and output growth. Issuance of bonds gets thegreatest impact on exchange rate and reserve requirement ratio. Exchange rate gets the greatesteffected by interest rate, reserve requirement ratio and monetary supply. Reserve requirement ratiogets the greatest effected by the impact of output growth.Since the central bank began to implementation of inflation targeting rule, the role of moneysupply in the monetary policy decision-making is more and more weakened because of long-terminstability in the relationship between money supply and inflation. After the financial crisis, theoperations of central bank balance sheet make the role of money supply in the economic stimulusto re-enter the people's vision. Therefore, this paper studied the two-pillar DSGE monetary policyrule model. The two pillars refered to the operational tools of monetary policy rule are interest ratesand money supply. The estimated coefficients of two pillars monetary policy rule and monetarygrowth rate target rule are compared and we found, two-pillar monetary policy rule model issuperior to the money growth rate target rule,and in terms of statistical significance, the two-pillarmodel is also better than the money growth rate target rule model. Monetary plays a certain role inexplaining economic dynamic characteristic. So central bank should make full use of the moneysupply growth tool in monetary policy-making.With the development of financial innovation, especially after the 2008 financial crisis, thecentral bank should take financial stability as a equally important task of monetary stability.Therefore, this article described the meaning of financial stability, including the definition offinancial stability, the relationship between monetary stability and financial stability, the threat offinancial stability. Then, we constructed the financial pressure index (FSI). The choice ofindicators refer to the definition of financial stability and the results of overseas research, the indexweights are get from the VAR model impulse response function.Volatility indicators are calculated by the GARCH model. Use the GMM method to estimatethe coefficients of the monetary policy rule reaction function. The results showed that, theestimated interest rate from the financial stress index extended monetary policy rule is good fit tothe volatility of the nominal interest rate path. Although interest rates are more sensitive to changefrom the financial stress index units, but the total contribution value of the financial stress index to interest rate adjustments is the smallest of all the variables.Fixed-parameter linear model form of the monetary policy rule reaction function could notreflect the relationship between monetary policy rule and the economic conditions. The centralbank monetary policy rule has the characteristics of the regime switching. Therefore, we performthe dynamic measurement test of the monetary policy rule, and we study the transfercharacteristics of monetary policy rule between the different regimes in China. The estimate resultsof MS-VAR model confirmed that the monetary policy rule shows regime-switching characteristics.In this paper, we do the dynamic forecast of 60 terms for every variable to outlook on the futureeconomic situation. From the predictable results, we found, economy maybe not have muchvolatility in the next five years in China. The economic growth rate will show a short-termfluctuation, but not harmful, it will continue to maintain a good development momentum. The pricelevel has been effectively controlled, and it basically maintain in a reasonable level of under 3%.The liquidity of financial system is in a good condition, financial will develop stably, the risk of thefinancial system will reduce further.