The Study On The Credibility Of Chinese Monetary Policy

From the point view of game,the working process of monetary policy is a dynamic game process between the policy makers and the public.The behavior and the decisions of the policy makers will affect the behavior and the decisions of the public.On the other hand,the public expectations will also produce the reaction on the policies made by policy makers.With the development of information technology,the public capacity of collecting and handling information has been greatly improved,the public will respond to the economic policy more quickly and more accurately.It means the reaction produced by public expectations on the policy effectiveness will become more apparent.Therefore,to analyze and study the formation mechanism of public expectations deeply,to strengthen guidance and management of the public expectations are helpful to improve the effectiveness of monetary policy.In short,the credibility of monetary policy refers to the public expectation on whether the monetary policy could achieve its goal announced by monetary authority.Its research object is the reaction of the public expectation for the future policy on the monetary policy.Lots of research and practice show that higher the credibility of monetary policy,the greater the guidance effect to the formation and decisive behavior of the public expectations,the better the policy effectiveness and vice versa.The current global economy is depressing and unstable,domestic inflation pressure has not been diminished,the economic structure is facing transformation,all those issues are intertwined,which makes macro-economic readjustment and control more difficult.How to effectively guide and manage the public expectation is becoming particularly important.Manage the inflation expectation was the one of the priorities of macro-economic readjustment and control was mentioned in the official documents in 2009.Therefore,clearly understanding the status,mechanism and determinants of the monetary policy credibility will help improve Chinese monetary authority’s capability of guiding and managing the public expectations,improve the effectiveness of monetary policy.This paper first defines the meaning and utility of monetary policy credibility.There is not a single authoritative definition of monetary policy credibility at present.Although,the differences among the different definitions do exist,all those definitions include the public expectations on whether the policy announced by the monetary authority can be executed.The research on the utility of monetary policy credibility has expanded around the monetary policy credibility influence on the policy effectiveness.By using a simple monetary policy game model,three conclusions are obtained.The improvement of monetary policy credibility can improve the monetary authority’s ability of guiding public expectation;The improvement of monetary policy credibility can eliminate the inflation bias;The improvement of monetary policy credibility can reduce the cost of anti-inflation policy.Secondly,on the basis of the comparison of three methods of monetary policy credibility measurement,the gap method,weighting method and information analysis method,combining with the Chinese actual situation,the gap method and weighting method are selected to measure the Chinese monetary policy credibility.This paper did the empirical test for the relation between actual inflation rates and inflation expectation from 1992 to 2011 by using unit root test,cointegration test,Granger causality test and impulse response analysis.Two conclusions obtained as following:first,the public expectation is an important variable to affect the Chinese macro economy.Second,the average of Chinese monetary policy credibility is low.Base on the above measurement results of Chinese monetary policy,this paper analyze the root cause of the missing of Chinese monetary policy credibility.Theoretically,the root cause of the missing of one nation’s monetary policy credibility includes technical and strategic factors.The major factor is the strategic factor which refers to in the game of monetary policy,the policy makers have the incentives to pursue the strategic advantage,to gain the short term interests by violating the policy announced before.These incentives are from four aspects;first,the market distortions make the monetary authorities believe that the potential output is comparative lower,so they hope to increase the output by making unexpected inflation;second,political factors take effects.Third,the fiscal budget deficit monetary brings the pressure on the central bank monetary policy;fourth,the policy makers’ pursuing their own interests makes for the deviation of the policy.Subsequently,combing with the actual situations of china,this paper analyze the deep-seated reasons of making the Chinese monetary policy credibility,which mainly include five aspects:the centralized power political system,inflation tendency of micro entities which have discourse power,fiscal dominant,financial dominant and external dominant.This paper also study the system or measures to improve Chinese policy credibility.The monetary policy transparency communicating with the public effectively can eliminate information asymmetry and improve the accuracy of the public expectations on one hand;On the other hand,it can reduce the cost of public supervision and effectively restrain the policy makers’ behaviors of making choices according to the circumstances.Therefore,increasing the policy transparency can effectively improve the policy credibility.The enhancement of central bank independence is good for improving the policy credibility.On one hand,it can give the central bank more autonomy and weaken the impact of pressure put on monetary policy by democratically elected government which did this only for meet their desire to stimulate the economy.It will provide a system of guarantee to the formation of stable public expectations.On the other hand,it allows the central bank respond to the disturbance on the economy.An unambiguous and clear monetary policy regulation can effectively constrain the central bank’s behavior of making decision depending on the situation,provide a commitment mechanism and make the future policy expectations stable in the financial market.But the strict regulations will affect the flexibility of the policy.The content of inflation targeting regulations is more abundant than the general rules.The clear and overwhelming target and good information communication mechanism advocated by those regulations make the monetary policy frame more transparent,more independent,more responsible and more flexible,all these is good for building monetary policy credibility.But at present in China,the comparative low transparency of monetary policy,comparative weak independence of central bank and discretionary mode of operation will affect the credibility level of Chinese monetary policy.These are what we need to improve.Finally,this paper summarizes related conclusions,and gives policy recommendations and suggestions of improving Chinese monetary credibility.