China's Monetary Policy And Exchange Rate Policy In An Open Economy

China's economy has maintained an average annual growth rate of 10% for more than 30 years.However,in recent years,with the rising of labor costs,the traditional competitive advantage is gradually weakened.In recent years,China's economic growth has been continuously below 8%.China's economy is under a critical period of economic transition from rapid growth to middle speed of growth.Along with the transition of economic structure,the financial system of our country is facing transformation as well.In this new system,market will play an important role in the allocation of various resources.This will involve a series of reforms including the capital account liberalization,interest rate and exchange rate marketization.According to "Trilemma" theory,a fixed exchange rate,free capital flow and monetary policy independence could not be achieved at the same time;countries can choose different policy combinations according to its macroeconomic objectives.As a country with huge foreign exchange reserves,what is china's combination of macro policy objectives and its impact on China's economic growth? What is the impact of international capital flow on the effectiveness of monetary policy under different exchange rate regime? Is China's exchange rate system in line with China's economic development goals? What kind of impact has china's monetary policy on the economic development of China,such as import and export,output,consumption and inflation? These are issues that we are going to study in this paper.The theoretical frameworks of this paper are based on trilemma theory,capital flows theory,new open economy macroeconomics model.Structural econometric models such as simultaneous equations econometrics model,Markov Switching vector autoregressive model,the new Keynes open economy DSGE model,Bayesian parameter estimation,impulse response analysis are adopted in the research of china's economic policy on economy and the relationship between exchange rate policy,international capital flow and the effective of monetary policy.Based on the research results,this paper puts forward the measures to reform the financial system and analyzes the institutional arrangements of interest rate and exchange rate marketization and capital account liberalization.This paper maily studies the following aspects:First,by constructing an MS-VAR model,the paper examines China's trilimma policy configuration of ‘exchange rate stability,monetary policy independence,capital openness' and their impacts on economic growth.The paper finds that while China places exchange rate stability as its primary goal,there exits regime switching after exchange rate policy reform.Furthermore,the trilemma index such as MI?ES?KO began to affect the economic growth after exchange rate policy reform.This indicates that a flexible exchange rate system is associated with the smooth transmission of the policy goals.The impact of capital openness to economy is still negative which indicates that we should not hasten to capital openness before a sound exchange rate and interest rate system have been established.Besides,by using a modified BGT model,this paper studies the effectiveness of monetary policy of PBOC when facing stock market fluctuation,house market fluctuation,international economic environment change and domestic financial reforms.The results show that: with the implementation of willingness exchange settlement system and the increased RMB exchange rate elasticity,the central bank's monetary autonomy has not been weakened;Factors such as interest rate,exchange rate,stock market,real estate market fluctuations,etc will affect the flow of international capital in an open economic environment;Central bank has taken various monetary policy operations such as sterilization via central bank bills or adjustment of required reserve ratio to counter these effects.Last,based on a small open economy New Keynesian DSGE model and the Taylor rules with the exchange rate preference,the paper studies the economic environment and its reactions to shocks before and after the exchange rate reform.The results show that:(1)the economic structure is more open after the reform;(2)Monetary policy achieves greater autonomy under flexible exchange rate regime;(3)Flexible exchange rate can act as shock absorbers;(4)the openness of economic environment is closely related to the effectiveness of monetary policy;(5)Expanding RMB exchange rate fluctuations will help improve trade conditions.