A Study On Independence Of China's Monetary Policy:Under Different Exchange Rate Regimes

The independence of monetary policy is the effective guarantee for the central bank using macroeconomic regulation method flexibly to achieve domestic economic goals.As a country's business cycle is inconsistent with the core countries,lack of monetary policy independence will weaken the ability of central bank in macroeconomic regulation.The world economy is in the period of structural adjustment.Exploring the impacts of Renminbi exchange rate regime choice on the China's monetary policy independence has significance in practice for China to choose suitable exchange rate regime and enhance central bank‘s ability in macroeconomic regulation.Mundell-Fleming model,the Impossible Trinity and Dilemma are not enough to explain the relationship between the Renminbi exchange rate regime and the independence of China's monetary policy.The reason is that China adopts multiple monetary policy tools and exists structural disequilibrium of balance of payments.This thesis argues that we should distinguish the independence of interest rate policy and quantitative monetary policy when discussing the independence of China's monetary policy,and the impacts of China's disequilibrium of balance of payments on monetary policy should be considered as well.This can more fully explain the influence of exchange rate regime choice on China's monetary policy independence.Based on the Mundell-Fleming model and the Impossible Trinity,this thesis constructs a new theoretical framework to explore the impact of the adjustment of U.S.monetary policy and disequilibrium of balance of payments on China's interest rate policy and quantitative monetary policy under different exchange rate regimes.The theoretical framework shows while one country has structural disequilibrium of balance of payments,the quantitative monetary policy is short of independence under the fixed exchange rate regime and the intermediate exchange rate regime,the flexibility of exchange rate regime does not always enhance the Independence,but the quantitative monetary policy is independent under the floating exchange rate regime.The independence of interest rate policy is not only depending on exchange rate regimes,but also depends on the trend of U.S.interest rate and the state of disequilibrium of balance of payments.This thesis sets up econometric models to explore the impacts of exchange rate regime choice on the independence of China's monetary policy.The empirical study shows four conclusions:(1)The empirical result of the structural break point test with the new external anchor currency model shows that the RMB exchange rate regime appeared five times change from 1999 to 2017 which turns to the direction of flexible and reflected apart from "dollarization" feature.(2)The vector auto regression model and factor augmented vector auto regression model results show that China's interest rate policy and quantitative monetary policy are short of independence to a certain extent.However,they are influenced by different kinds of factors.Interest rate policy is mainly influenced by the change of foreign monetary policy while the quantitative monetary policy is affected by the change of China's foreign exchange reserves.(3)The empirical results of time-varying vector autoregressive models show that the increase of exchange rate regime flexibility does not necessarily enhance the independence of China's interest rate policy and quantitative monetary policy.The impact effect of RMB exchange rate regime on China's monetary policy independence is affected by the adjustment of the US monetary policy,the China's balance of payments and the effectiveness of foreign exchange sterilization policy.During the global financial crisis,the monetary policy of the developed economies has larger spillover effects on China's monetary policy.(4)U.S.monetary policy and global monetary policy factor have a significant impact on China's price factors,but have no significant influence on China's output factors and financial market.The experience of exchange rate regime reform in Japan and Thailand show that in the process of exchange rate regime reform,using capital control tools flexibly will reduce the foreign exchange market intervention pressure and enhance the independence of monetary policy.Choosing an inappropriate timing for exchange rate regime reform is easy to cause financial risks and reduce the independence of monetary policy.The lack of independence in monetary policy will have a further negative impact on the domestic economy.China's balance of payments has structural changes.Keeping a twin surpluses has become a history.With the deepening of world financial integration and the Chinese economy getting more open to the rest of world,the scale of cross-border capital flows keep growing,so it is more difficult to take capital controls.Since China is a large economy,which demands central bank's strong macro economic control capacity.Therefore,it is necessary to create conditions and choose a good timing to make the RMB exchange rate more market-oriented,promote the equilibrium of balance of payments,and enhance the independence of monetary policy.