Research On Price Stability And Constuction Of China's Monetary Policy Framework

Whether monetary policy is effective or not means that it can or cannot affect the real economy after implementing it. In west macroeconomics, employment, output and income are the most important variables. In fact, the influence on the real economy of the monetary policy is that on these three variables. If the money supply only gives rise to price change, the money supply is neutral. If the money supply gives rise to the real economic variables change, the money supply is effective, especially it brings about the economic growth.For hundreds of years in the economics and financial fields, liberalism and intervention thoughts are intervolved. The core issue is the policy effectiveness. This thesis first summarizes the opinions on monetary policy effectiveness and the contemporary ideas. Since the controversy has lasted for hundreds of years, and the overseas research is earlier than domestic research, I divide this part into two sections: overseas and domestic. The overseas section abides by the time order to discuss the opinions, but the domestic section is syntheses. I introduce the classical theory, Keynes, Neoclassical synthesis, Monetarism, Rational Expectations, New-Keynesian Economics theories, Real Business Cycle Theory and the opinions of Viksier, Barro, Gordon, Mundell. The classical theory is neutral, they held the opinion that money is a veil on the real economy and only as a medium of goods exchange. The world crisis in 1930's gave birth to the Keynes theory. Keynes admitted the non-sufficient employment and he pointed out that we could not ignore the money supply. While western countries came into stagnation in 1960's, many theories denied the Keynes theory, such as Monetarism, critising the Keynes theory. After 1990's, all the schools except Rational Expectations and Real Business Cycle Theory had admitted that the monetary policy is effective in the short run. People came to realize what the monetary policy can do or cannot do. In the domestic section, the thesis summarizes the opinions and new progresses in China.With controversy going on, many goals emerged among the central banks. The four goals are price stability, economic growth, sufficient employment, balance of payments. They added the financial stability later. While the inflation made people come to realize that inflation is the first enemy in economy, and it can not last for a long time for the government to get seigniorage tax through inflation. After long practice, most of the countries selected the same goal, which is price stability. What is the real meaning of price stability? The thesis summarizes two aspects, one is bidirectional control, which means it will control not only the inflation but also the deflation. The other one is dynamic, which means the price can not stay at the same level, while the price level should be controlled in a narrow area.Central bank should try its best to achieve the goal through endeavor. In due course, it must select a target to observe the effectiveness and then adjust. So the thesis probes into the problem that how to select a proper target. In practice, many countries selected the target which can be observed and has high correlation to the goals. Money supply, interest rate, and exchange rate were taken as the targets (or normal anchor) and put into practice. Money supply and fixed exchange rate are still used in some countries, interest rate became an instrumental rule (or an operational target), but nominal GDP is not thought much of by economists. But the target selection embodied a same tendency, that is Inflation Targeting. More and more economists including Bernanke and Lars E O Svensson show strong interest in this framework. Not only New Zealand published their explicit inflation targeting, but also America implemented the implicit inflation targeting, these countries made the goal and target closer, and took a flexible monetary policy to deal with the problems in short run and long run.Inflation targeting is a monetary strategy which was first implemented by New Zealand. It got big success not only in stabilizing the price level but also stabilizing the real economy. More than 20 industrialization countries and non-industrialization countries have adopted this framework by 2008. Why so many countries were willing to adopting inflation targeting? The thesis discusses this problem in a separated part. Inflation targeting is a framework which takes the inflation as target rules and discretion under some restriction. It does have not only the rule character but also flexibility. It combines the policy and medium-long goal together, and does not do harm to the capacity of central bank in dealing with the short term problem. So this framework compromises between the hard rule and discretion flexibility. The target of this framework is relatively faint, and central banks select the inflation forecast as target and make the forecast equal the target. It pays attention to strengthening transparency through communication, emphasizing the independence and responsibility. Did the financial crisis which breaks out in America of 2007 mean the failure of Inflation targeting? I deny this point. In essence, the financial crisis embodied the precondition problem of Inflation targeting. That means Inflation targeting must be based on the financial stability.Then how did China's monetary policy framework evolve and what problems are there in present framework? So in the final part, I discuss these problems. The reader can see, China's monetary policy framework went with function reform of the People's Bank of China. From foundation of the People's Republic of China till now, the evolution of monetary policy framework of China can be divided into three periods:before reform-open up (1948-1978), the twenty years after reform-open up (1979-1997), and indirect controlling (1998 till now) periods. The goal of present China's monetary policy framework is to keep RMB stabilized and accelerate the economic growth. The operational target is base money, the middle target is money supply, and instruments include open market operation, reserve, interest rate, loan, rediscount, credit policy, window guidance, special deposit etc. There are many problems in the framework. The goal is not exclusive, and price stability is not taken as the first goal. The interest rate was under control for a long time by the central bank, and Shibor is being constructed. The feasibility of Money supply as target is becoming weaken, controlling loan channel becomes more difficult, position for Foreign Exchange Purchased channel influenced more obviously, and money supply has little relation to GDP, only gave rise to high price in the long run. Unfair confiscating land institute reduced land, and the local government dominated the investment so that it pushed up the price level. The PBC has transparency to some extent, but independence is restricted to a large extent. Exterior factors such as oil, soybean depended on import gave rise to the high domestic price, which were affected by international market. So I think that we should develop toward the inflation targeting, and construct a framework that price stability is core with discretion under restriction. To achieve the goal, we should enact the goal, select target, promote interest rate reform, strengthen independence, transparency and responsibility, keep financial stability, pay more attention to the asset price change, etc, and then implement some reforms.