Research On The Influence Of Exchange Rate System On The Independence Of Monetary Policy

Maintaining the independence of monetary policy is of great significance for a country's government,because it is the premise of effective use of monetary policy tools.The government can use monetary policy tools to execute counter-cyclical operation,avoid excessive prosperity and depression of economy,reduce the fluctuation of output and investment,and maintain the healthy and stable development of economy.The traditional research holds that the exchange rate system is an important factor affecting the independence of a country's monetary policy,and its representative theory is trilemma.The theory holds that the floating exchange rate system can effectively maintain the independence of monetary policy when the capital account is open,but with the continuous acceleration of global capital flows,this theory subjects to challenge.The theory of dilemma holds that the floating exchange rate cannot protect the economy from the influence of global financial cycle when capital flows freely,only under the control of capital account the independence of monetary policy could realize.Therefore,the trilemma transforms into dilemma,the government must make a choice between the free flow of capital and the independence of monetary policy.If the dilemma is true,it indicates that under an open economic condition the independence of monetary policy cannot maintain unless government execute capital account control,which will have a huge impact on the formulation of a country's monetary policy.Therefore,it is of great significance to study the impact of exchange rate system on the independence of monetary policy.This article analyzes the impact of the exchange rate system on the independence of monetary policy from two perspectives,one is global and the other is Chinese.The global perspective mainly analyzes the performance of monetary policy independence under different exchange rate systems through large sample data,so that we could investigate whether the dilemma is ubiquity in most countries.The Chinese perspective mainly analyzes whether the trilemma theory is still applicative in China,so that we could provide some reference for China's future exchange rate system reform and monetary policy formulation.For global samples,we first categorize the exchange rate regimes and capital controls.Compared with previous studies,we add the intermediate exchange rate regimes and capital account partial controls.The regression results show that under the complete capital account regulation or floating exchange rate system,domestic interest rate are not affected by the change of foreign interest rates,the monetary policy remains independent.While the exchange rates is fixed and capital account is opening,domestic interest rates will be influenced by foreign interest rates,the independence of monetary policy lacks,which is consistent with the conclusion of thetrilemma theory.In addition,under the intermediate exchange rate system,the domestic interest rate is not affected by the changes of foreign interest rates,but under the partial capital account control,the foreign interest rate in the sample of the fixed exchange rate system is significant at the level of 5%.It indicates that the partial capital account control cannot provide monetary policy independence,but the intermediate exchange rate system could.In order to explore the differences among different types of countries,this paper also divided the samples into developed countries and emerging market countries.The regression results show that the majority of the samples of developed countries are floating exchange rates and capital account opening,and monetary policy is relatively more independent.Emerging market countries prefer to adopt intermediate exchange rate and complete capital account control,although monetary policy is independent in the case of complete capital account control and floating exchange rate system,but under the partial capital account control and the intermediate exchange rate system,the monetary policy independence lacks.For the Chinese sample,we use the time-varying parameter vector autoregressive model to study the impact of different exchange rate regimes on the independence of China's monetary policy.Before the regression analysis,this paper first estimated the openness of China's capital account and the RMB exchange rate system.Among them,the openness of capital account is based on the legal capital account,while the RMB exchange rate system is based on the de facto exchange rate system.The analysis shows that China's capital account is increasingly open in general and the RMB exchange rate regime is moving towards greater flexibility,but during the2008 financial crisis,the RMB exchange rate system has once again pegged to the US dollar.The measurement results of the time-varying parameter vector autoregressive model shows that the increase of the flexibility of the exchange rate regime can effectively improve the independence of China's monetary policy,but the degree of improvement could be affected by the openness of the capital account.Therefore,this article suggests that the trilemma is still valid,and under the condition of open economy,the floating exchange rate system can effectively maintain the independence of monetary policy.For China,improving the flexibility of RMB exchange rate system is a direction of future reform.However,in the reform process,we should pay attention to the sequence of RMB exchange rate system reform and capital account opening,and the RMB exchange rate system reform should be first.At the same time,we should adopt a more cautious and gradual way to execute the reform of the exchange rate system,in order to realize the balanced transformation of the RMB exchange rate system.In addition,since China's economic development is still relatively dependent on foreign trade at the present stage,it is still a focus of our work to avoid drasticfluctuations of exchange rate,and we should strengthen the supervision of the financial system and establish an early warning mechanism to prevent speculative currency shocks.