Empirical Study On Chinese Monetary Policy Targeting In Open Economy

The global economic and financial integration accelerate the opening of the market in every country and the international flow of capital, and improve the optimization of resources in the world from the microscopic view. However, the change of the entire financial operating environment on which the implementation of monetary policy depends makes the formulation of economic policy difficult for the government in the macroscopic perspective. Every government should not only consider the domestic macroeconomic performances, but also concern about external environmental factors like the world economic fluctuations and international capital flows. Meanwhile, the global economic and international capital flows will also react to the changes of monetary policy, thereby affecting the effects of monetary policy. In an open economy, the traditional tools of monetary policy have been unable to meet the new financial environment, so that the choice of monetary policy targeting needs to adapt to new changes. Since the beginning of the21st century, the economy in China has been overheating and cooling alternately. Specific performances are that the asset price inflates, foreign trade frictions intensify, RMB is forced to appreciate, and so on. These contradictions led to frequent operations of China’s central bank, while the effects of its monetary policy like frequent and strong controls of emergency funds were not prominent. As a result, it is worthy of further study about China’s monetary policy issues such as the effectiveness of monetary policy and the choice of monetary policy targeting.Broadly speaking, the paper is under the basic framework of economics researches. Based on the extensive data collection, it focuses on the combination of the use of methods and researches on problems in particular. Then, it starts from the basic problems of China’s economic growth, and analyzes the choice of China’s monetary policy targeting. The article is divided into following seven chapters:Chapter1is Introduction. This chapter gives a general introduction for the dissertation. It mainly describes three aspects, including background and significance, technology roadmap and research methods, and research contents and innovations. Chapter2is the overview of related theories about monetary policy. First of all, this chapter defines and discriminates related concepts about monetary policy, mainly introducing concepts which are closely related with this paper, such as the monetary policy, the intermediate target, the ultimate target, the ultimate target rule, and the nominal anchor. Next, it describes some related theories about the selection of monetary policy intermediate target, including Post Keynesian School, Monetarist School, Keynesian School and so on. Then, it presents some related theories about the monetary policy ultimate target, including time inconsistency of monetary policy and rational expectations, and analyzes optional principles of monetary policy. At last, it reviews the evolution of China’s monetary policy.Chapter3is the analysis of China’s monetary policy’s effectiveness in an open economy. On the basis of theoretical analysis of the effectiveness of monetary policy, this chapter begins with two views-the achievement of macroeconomic objectives and the selection of monetary policy tools. Based on the evolution of China’s monetary policy, it uses econometric methods, like impulse response function and variance decomposition in VAR model, to analyze and evaluate the effectiveness of China’s monetary policy since the Asian financial crisis in empirical perspective. In this chapter, it will build empirical models respectively for three periods ’anti-deflation’,’deceleration and anti-inflation’ and ’growth maintenance, anti-inflation and anti-deflation’ as well as a model for the entire sample period, and then make an empirical comparison on the effectiveness of China’s monetary policy under different economic stages.Chapter4is the choice of intermediate targets for monetary supply in open economy. This chapter analyses the feasibility of the intermediate indicator of monetary policy which is the money supply in China in the perspectives of theory and empirical proof from four aspects:correlation, measurability, controllability and transmission. Besides, this analysis is based on three standards for the choice of intermediate targets for monetary policy and also combined with the economic situation. Finally, some corresponding conclusions are similarly draw.Chapter5is the choice of intermediate targets for interest rates in China. This chapter makes a theoretical and empirical analysis of Taylor rules and their extended forms to determine which form can simulate the trend of monetary policy effectively in China, and thus determining whether interest rates can be used as the intermediate target of monetary policy. In addition, this chapter also studies the possible problems emerging in the process of implementation of Taylor rules based on the empirical conclusions. The conclusion draw in this chapter is that interest rate is the principle of policies when the government takes measures to control the interest rates. The original Taylor rule does not apply to China while extended Taylor rules are more applicable.Chapter6is the selection of China’s monetary policy targeting in an open economy. In the first place, this chapter makes a comparative analysis of China’s current exchange rate targeting, monetary targeting and inflation targeting, and finds that the inflation targeting can be good to make up for the shortcomings of the current targeting. In the second place, it analyzes the conditions required for the inflation targeting to implement in China from four aspects-the system, the economy, the technology and the market. Finally, it establishes a theoretical model and makes an empirical analysis on the basis of minimizing the loss function of monetary policy. The results show that the inflation deviation of inflation targeting is less than that of contingent choice, so that the inflation targeting is the trend for China’s monetary policy in the future.Chapter7is the conclusion. This chapter summarizes the overall conclusions of the paper, provides some corresponding policy recommendations, and proposes future research prospects.This paper makes innovative research on the following aspects. First, this paper not only examines the effectiveness of monetary policy goals in the traditional research, but also considers the effectiveness of the selection of control tools of monetary policy. The whole sample period is divided into different stages, to examine the effectiveness of monetary policy in the different period separately. Second, most domestic scholars do not make a clear recognition on the distinction between intermediate target of monetary policy and ultimate goal of monetary policy. This paper will provide a clearly distinction of the both in the process of researching. Third, based on the empirical test of the feasibility, influence factors and suitable conditions of monetary policy, this paper makes a deep research on the intermediate target of interest rate. By researching the Taylor rule contained a financial condition index, which is constructed to contain major assets and financial information, and some other Taylor rules, this paper proved that the model here is applicable and reliable. Fourth, by contrastive analysis the difference between the current targeting and agile inflation targeting, this paper finds that agile inflation targeting is a viable option of monetary policy for China to choose. This paper deduces the optimal monetary rules of agile inflation targeting mathematically, and empirical tests the effect with the actual data in China. However, most of the researches only focus on the perspective of empirical test, which lacks clear theoretical basis.