| The importance of liquidity to the financial system was emphasized unprecedentedly after the Asian financial crisis. To maintain liquidity has become one of the basic principles of improving the operation of the financial system. In recent years, liquidity surplus has become the most frequently used concept when people were talking about the macroeconomics and capital market. This concept has a deep impact, not only on making investment decisions by people, but also on making macroeconomic policy decisions by the government. "The overall scale of investment in fixed assets is still too large, the problem of liquidity surplus in the banking system is serious, and the factors causing overheated investment and excess credit still remain", said Premier Wen Jiabao in his government report for the year 2007. In order to cope with the problem of liquidity surplus actively, the report also pointed out that we should continue to implement a prudent monetary policy, make comprehensive use of various monetary policy tools, adjust money supply and aggregate credit, and alleviate the problem of liquidity surplus in the banking system effectively. The monetary policy of PBC since 2007 has been almost centering on the theme Liquidity Surplus. Since 2007, PBC frequently curbs liquidity surplus by using the legal deposit reserve ratio, benchmark rate, central bank bonds, currency swaps and other liquidity management tools. However, the results are not very obvious. The reasons may come from two aspects. First, because liquidity surplus weakened the transmission mechanism of interest rates, raising the benchmark interest rate blindly cannot effectively stabilize output and inflation. On the contrary, when the benchmark interest rate is raised above a critical point, the liquidity surplus would be suddenly transformed into liquidity shortage and it would result in asset bubble burst and the economic crisis. A typical example is American Subprime Crisis. Secondly, although the central bank used liquidity management tools such as bills and currency swaps, the liquidity management of the central bank is still in a state of blind control because of the lack of an optimal liquidity target.Based on the liquidity surplus, this paper attempts to construct framework of the Chinese inflation targeting. First, this paper uses the liquidity surplus as the starting point and tries to seek theoretical and practical basis for implementing inflation targeting in China. Secondly, this paper attempts to construct the Chinese inflation targeting system based on the liquidity surplus. This system consists of three aspects. The first one is institutional conditions, which are to increase the responsibility and independency of the central bank, and the transparency of monetary policy. The second one is the liquidity management strategy, which is to determine a reasonable range of liquidity surplus and stabilize the expectation of liquidity surplus. The third one is robustly optimal interest-rate rules based on the liquidity surplus, for achieving the expected inflation target which is promised by the central bank.In particular, this paper includes four chapters in addition to the introduction and conclusion.In the second chapter, the paper recalls the theoretical basis of the inflation targeting, including the intension and theoretical origin of the inflation targeting, and the theory of monetary policy rules. In the intension part, the paper tends to a more comprehensive definition of inflation targeting, which follows the institutional arrangements of the dynamically optimal monetary policy rules. In the theoretical origin part, the paper outlines and analyzes the theories, such as Wicksell’s natural rate of interest, Fisher’s currency transaction equation, the Keynesian’s interest rate theory and Friedman’s money-growth rules, and the recent neoclassical analysis of optimal monetary policy rules, to explore the generating process of inflation targeting. In the part of the theory of monetary policy rules, the paper makes a comparison among the money supply rules, the exchange-rate rules, the nominal income rules, the interest-rate rules and the inflation targeting rules to explore the superiority of the inflation targeting rules over other monetary policy rules.In the third chapter, the paper builds a benchmark framework for the theory of the inflation targeting. It can also be called a basic monetary policy framework of the inflation targeting, including the model framework, the optimizing objects and the policy framework. The model framework analyzes the benchmark Liner Rational Expectation model. The optimizing objects recall the target point and target range of implementing the inflation targeting in developed counties and emerging market economies, and the specific measures taken to implement the framework of inflation targeting by these countries. The policy framework analyzes the development of inflation targeting in different countries, studies the experience characteristics of the policy framework, institution system and economic performance after the policy transformation of the inflation targeting countries, and then based on liquidity surplus analyzes the theoretical and realistic basis of inflation targeting in transition economies.In the fourth chapter, the paper discusses the intension of liquidity surplus and makes a quantitative measurement and factor analysis based on the maturity structure of assets. On this basis, it also draws up the liquidity management strategy. The liquidity management strategy should include at least three aspects. The first one is to keep tradeoff between the current liquidity surplus and the expected liquidity surplus. The second one is to regulate the expected liquidity surplus, which is the expectation management of liquidity surplus. The third one is to regulate the current liquidity surplus, which is the factor management of liquidity surplus. The key to the implementation of inflation targeting of the central bank based on liquidity surplus is to manage the expected liquidity surplus and inflation expectation with the inflation targeting, manage the current liquidity surplus with the management strategy of liquidity surplus, and then keep a low level of tradeoff between the expected liquidity surplus and the current liquidity surplus.In the fifth chapter, the paper makes an empirical analysis and impulse-response analysis of the robustly optimal interest-rate rule of the inflation targeting, which has considered the liquidity surplus, by using the Chinese economic data from 1993. I to 2009.Ⅳ. The empirical analysis shows that the dynamic characteristic of the inflation in China has a typical character of mixed Phillips curve. It means that the backward-looking adaptive expectations and forward-looking rational expectation exist at the same time. The reaction coefficient of short-term nominal interest rate to inflation and output gap is the function of liquidity surplus. The reaction coefficient of short-term nominal interest rate to inflation and output gap is weakened with the increase of liquidity surplus. As the increase of liquidity surplus, the reaction coefficient of short-term nominal interest rate to output gap should be turned negatively from passively. The impulse-response analysis shows that when the economic shock occurs, the policy target variable deviates from the steady level at first, and then it will gradually recover to the steady level in the future. The deviation of the policy target variable to the steady level is positively correlated to the level of initial liquidity surplus. It suggests that the liquidity surplus will reduce the effectiveness of monetary policy and increase the cost of monetary policy. The central bank should use the liquidity management strategy to control the current liquidity surplus and the expected liquidity surplus. |
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