Inflation Expectation Management,Policy Game And Monetary Policy Effectiveness

Inflation expectation is subjective assessment towards future actual inflation,which can affect microcosmic body's decision making,total social supply and demand.Central bank can pose expectation guidance,coordination and management towards microcosmic body through expectation management,therefore providing market transparency and rules.Monetary policy regulation must be conducted as promised so to enhance its effectiveness and then market will respond even before the actual conduction of monetary policy.Traditional macroscopic theory is not a big fan on expectation management.It was not until the 1990s that expectation management was gradually accepted because New Keynesianism believes that wage and price possess stickiness and that expected policy will also affect economic cycle.The outbreak of global financial crisis in 2008 provided realistic soil for the development of expectation management.When the theoretical zero below bound became the realistic challenge facing monetary policy makers,major economies like U.S.have begun to recognize the importance of monetary policy expectation management and joined the team of forward guidance one after another.With Chinese economy entering new normal stage,the monetary policy regulation marginal utility seems diminishing,increased uncertainties stand out the heterogeneity of market expectation,hence posing higher requirements on monetary policy making and implementing.Meanwhile,the leaping development of internet and big data are shaping economic entities and influencing ways and means of macroeconomic control.The time lag of monetary policy is getting shorter and shorter.A tiny signal can trigger the butterfly effect,and pose great influence on supply-demand equilibrium,therefore lead to drastic fluctuations in the market.All these factors urge the monetary authorities to use expectation management method flexibly and scientifically.Authorities can guide market participants' behavior choices by changing their expectations,therefore grasp development directions of the economy.This paper reviews literatures regarding inflation expectation management,monetary policy game,expectation management and monetary policy effectiveness,and conducts systematic research on macroeconomic expectation management and monetary policy effectiveness.First,the paper uses iterative method to measure national public learning expectation.On this basis,the paper studies the disequilibrium fluctuation features of Chinese inflation,seeks trap area of inflation,then conducts research on the in-depth influencing factors and mechanism of Chinese inflation expectation.Second,the paper uses the monetary policy game model to connect the actual strategic choice of the central bank and the inflation expectation of the public.And then the paper conducts research on central bank's role of implementing expectation management on enhancing monetary policy regulation effectiveness,therefore providing reliable theoretical foundation for effectively guiding expectation and enhancing expectation.Then,the paper builds a DSGE model to assess the role and effect of expectation management in the transformation process of monetary policy and studies the ability of expectation management facing economic fluctuations,thus open the black box of expectation management,and provide empirical evidence for central bank to implement expectation management.Fourth,the paper conducts systematic examination towards the implementation background,basic theories of international forward guidance,proceeds systematic comparison researches on forward practices of U.S.,U.K.,EU and other countries,and evaluates the implementation performance and potential risks.Based on the theoretical research and empirical result,the paper offers policy proposals on enhancing monetary policy effectiveness through expectation management and improving system construction regarding Chinese practical situation.The main conclusions of this paper are as follows:First,Chinese public inflation expectation is the learning and adaptive expectation converging towards actual inflation,which shows strong inertia and possesses disequilibrium fluctuation and asymmetrical reflection features.China has two evident inflation trap areas proving the existence of time inconsistency on its monetary policy.Second,the higher the inflation expectation management level is,the lower the inflation level and the smaller inflation fluctuation will be.Policy transparency is the key to expectation management.The higher the policy transparency level is,the higher the correctness of information disclosure will be.So the guidance effect towards public expectation will be bigger.The higher the correctness of information disclosure is,the less the marginal benefit changes brought by policy changes and the monetary policy changes will be.So the monetary policy initiative of the central bank will be poorer.The independence of central bank is closely relative to the implementation effect of expectation management.Third,in the context of diminishing effect of monetary policy,comparing to no expectation management the fluctuation ranges of the main macroeconomic indexes such as output,consumption,investment and inflation have dropped 49.4%,36.4%,37.7%,and 46.7%when central bank implementing expectation management and can quickly return to normal status.Meanwhile,according to the analysis of the monetary policy welfare function,enhancing expectation management can make the welfare loss decline to nearly 47%.Chinese central bank should pay more attention on expectation management in the process of monetary policy transformation.The main innovations of this paper are as follows:First,make the learning expectation of Chinese public as the entry point.The paper includes the influence of learning rate and historical experience on expectation,resulting in the expected value of microscopic body.The empirical analysis shows a higher precision and a better fitting with Chinese practical situation.Second,study macro effect of central bank expectation guidance from the point of monetary policy game.The paper builds a monetary policy game model suitable to Chinese reality,conducts qualitative research on internal correlation logic between monetary policy communication,transparency,central bank independence and other factors,and macro regulation effect,which enriches theoretical basis of expectation management.Third,builds a New Keynesianism DSGE model containing expectation error shocks.The paper studies the transmission effect and mechanism of expectation error shocks and other actual shocks on major macro economic variables,assesses expectation management effects on Chinese monetary policy regulation.Meanwhile,the paper conducts qualitative research on the effects of expectation management using welfare loss analysis method.