Research Under The Open Economy, Monetary Policy Efficiency

The macro environment of monetary policy is changed under open economy. The capital flow from economic globalization also distorts the transmission mechanism of monetary policy. The overflow effect of each country's individual monetary policy further restricts the complete independence of central banks. All these factors, adding together, change the feedback and transmission mechanism of monetary policy implementation. Therefore, it is impossible for central banks to achieve multiple targets at the same time. A floating exchange system could not bring the operation space for independent monetary policy either.To further research the monetary policy efficiency under open economy, this article extends the monetary mechanism under floating and fixed exchange rate in M-F model. By establishing an extended M-F model containing yield expectation and capital speculation, the author holds that under open economy, capital speculation can result in failure of monetary policy in adjusting both inner and outside imbalance. Thorough further releasing the restrict of IS-LM-BP model, this article also analyzes the monetary policy transmission mechanism under open economy and draws the conclusion that with the expectation of capital market yields, the traditional Mundell effects of monetary policy is dynamic. The rate cut firstly results in economy expansion and trade surplus, the process shall then be reversed with the change of capital market yields expectation.From the perspective of world economy, this article first compares the monetary policy efficiency problem of Japan and Germany during Bretton Woods Agreements system, then compares the similar problem happens in Vietnam and India during Post- Bretton system period. The experience comparison shows that even in an open economy, the central bank's monetary policy shall remain at inflation targeting. There is no free lunch. A multi-targeting monetary policy has to pay a higher cost at last. During the transitional process to open economy, the PBC also faces the monetary policy effect abate and distortion problems from growing capital shock and exogenous background. The detailed forms are: the difficulty of choosing monetary policy target, the predicament in monetary policy intermediate targets, the abating of monetary policy effect, and the distortion of monetary policy transmission. Thorough a research over the mutual relationship between exchange and monetary policy since RMB floated, this article draws the conclusion that:1. Interest rate parity can not exploit its power over capital flow when there is capital market and exchange rate fluctuation expectation.2. There is not a simple substitution relationship between inflation and exchange appreciation. It is either proper to push inflation to lessen pressure from exchange appreciation, nor to push appreciation to ease inflation. The above action will all lead to inner imbalance of economy.3. Under open economy, since it is impossible to realize outside balance thorough monetary policy, PBC shall carry on an inflation targeting monetary policy to exploit its restricted power.Based on those points of view, this author carries on a series of empirical research. The empirical results from VAR, Granger test and regression test further prove these views.On the other side, as long as there is a Bretton II system, the"beggar-the-neighbor-effect"of United States shall definitely lead to world wide liquidity overflow and asset bubbles. When the bubble bursts, to avoid the financial crisis, the central banks of world then have to turn to more tolerant monetary policy. In an open economy, the"prisoner game effect"makes the central banks wish pass the inflation to others while keep the growth within their own countries. While the FED carries on an indulgent monetary policy, its asymmetric position in the international monetary system then makes dilemma for all other countries: when economy is going up, the central bank has to increase its currency issue to digest the dollar reserve. This adds the risks of economy over hot and asset bubbles. During the regression period, the central bank has to consider the deflation risk due to dollar outflow when it tries a looser monetary policy. From a longer perspective, to break off the fetters of dollar standard is a premise of improving monetary policy effect under open economy.