Study On The Standard Selection Of Monetary Policy

Monetary policy is an important instrument of macroeconomic management of government. Discretionary monetary policy had been implemented to eliminate the economic variation, about which no one was suspicious. With advent of "dynamic inconsistence" in the 1970s, the standard selection of monetary policy again aroused people's concentration. The theme of this article is to discuss the "dynamic inconsistence", its solution and the relative choice of China's monetary policy with game theory.In this paper, we first analyze the relative hypothesis and its classification. Then, we discuss the "dynamic inconsistence" of monetary policy. In the case of complete information, if it is static game, discretion is inferior to rules because of the "dynamic inconsistence"; if it is dynamic game, the inflation of discretion may be decreased under specific discount condition. In the case of incomplete information, a weak central bank may disguise a strong one for its credibility. When something unexpected occurs, the standard selection embodies the convertibility of flexibility and credibility. Namely, either of discretion and rules has its superiority. After that, the article puts forward some institutional arrangements such as conservative central-banker approach and optimal-contract approach which fully consider this convertibility. In the last, we discuss the final target of China's monetary policy and the independence of central bank. It points out the importance to design an inflation rate target.