Extended Taylor Rule And Its Applicability In China

In this paper, based on the design, analysis the current domestic and international monetary policyrule selection and operation, we focus on the applicability of Taylor rule in china. Through theexpansion of Taylor rule, using mathematical economics and econometrics method of theoretical andempirical analysis, we obtain some important theoretical and empirical evidence. The thesisconducts the research from six aspects, including the general characteristics of the Taylor rule,exchange controls under the Taylor rule, nonlinear Taylor rule, Taylor rule with sunspot shocks andsticky information, and Taylor rule and macroeconomic stability. The main work and conclusions isas follows:First, in view of the Taylor rule as a monetary policy rule for the conditions, we studied eightgeneral characteristics of the Taylor rule, and the empirical testing of these characteristics. Researchresults show that the Taylor rule does not have the ability to stabilize the economy, but the role ofinterest rate transmission mechanism is enhancing, which can be used as a reference to China’smonetary policy rules. At the same time, adding money supply factors of the Taylor rule can betterreflect the monetary policy rule in China.Second, we obtained the optimal monetary policy rules function——Taylor rule, through thecentral bank loss function and dynamic macroeconomic model under open conditions, and analyzedthe effect of exchange controls on monetary policy rules, trying to test the effect of exchange rate onthe monetary policy rules. We estimated the coefficient of Taylor rule, and the results shows thatunder the exchange controls, the exchange rate transmission mechanism, there is no significant effecton Taylor rule, the interest rate is mainly affected by inflation. Therefore, we analyzed the effect ofinterest rate impact on the economy DSGE simulation analysis in the new open economymacroeconomics framework, and we found that the managed floating exchange rate system caneffectively isolate the impact of domestic and foreign, which confirms the interest rate in the Taylorrule inadequate response to the reality on the exchange rate.Third, the research on nonlinear transmission mechanism of monetary policy rules seriouslyinsufficient, and the central bank may be deviation of target variable has a different reaction. Weobtained nonlinear optimal Taylor rule through the appropriate modification in the generalequilibrium framework for the central bank’s loss function or introducing nonlinear Phillips curve.At the same time, using the logarithmic smoothing transition autoregressive (LSTAR) model, we test the nonlinear Taylor rule and the results show that the Taylor rule exists nonlinear characteristics inour country. In nonlinear Taylor rule, regardless of nominal interest rate, money supply change orexchange rate changes as a variable of nonlinear transformation, interest rates are insufficientresponse to inflation, which may cause economic instability. Insufficient validity of Taylor rule inChina shows that Chinese interest rate transmission mechanism can also have many problems.Fourth, the development of new macroeconomic theory make we began to re-examine themonetary rules effect under the condition of sticky information. In this paper, we study Chineseeconomy in the framework of sticky information general equilibrium which includes goods laborand financial markets. We think agents update their information sets sporadically, when settingprices, wages, and consumption. At the same time, we also assume that the monetary authorities tointerest rate rules as an operation tool, and analyze all sorts of shock pulse response function andvariance decomposition, under the calibration and the DSGE model. It finds that:(1) productivitychange is most sensitive;(2) whether monetary policy is tight or not depends different states;(3) thelabor supply and output (gap) caused by the increase of economic effect is similar, but differentamplitude size;(4) the product prices and wages in a variety of factors impact effect little.;(5) Thevariable fluctuations mainly from aggregate productivity shocks.Fifth, research on Taylor rule on the macroeconomic system stability equilibrium problem, thelong-term relationship of interest and economic variables is important, rather than the short-termrelationship. Therefore, we respectively study the general Taylor rule and the smoothing effectTaylor rule of macroeconomic system stability problem in the new Keynesian framework, a dynamicstochastic general equilibrium model. Through a simple pulse response figure, we found the Taylorrule with a smoothing reduce the effects of monetary policy shocks on the economic. We alsodiscussed the monetary endogeneity problem in the DSGE model, as long as the central bank usingthe interest rate policy as monetary policy, and economic satisfy the inter-temporal optimal, themoney supply is endogenous. Appropriately increase other economic disturbance, can improve themodel’s ability to explain the reality.Sixth, in order to study the Taylor rule of Chinese macroeconomic system indeterminacyequilibrium, we introduced sunspot shocks in the foundation of the new Keynes dynamic stochasticequilibrium model, using the Bias statistical inference method of estimation of DSGE model.Through the introduction of monetary policy shocks, supply shocks, demand shocks and sunspotshocks, using1996to2012data, we test for Taylor rule in China to depict the indeterminacyequilibrium. The results show that, the Taylor rule in China is indeterminacy, and sunspot shocks canlead to "Self-actualization" equilibrium. Although the sunspot shocks can have significant impact on the endogenous variables, the basic impulse conduction role is limited. Therefore, in the economicsystem, the indeterminacy is mainly affected by fundamental shocks.