The Analysis Of Interest Rate Rule Of Monetary Policy In China

In 1996, the People's Bank of China unlocked the interest rate of inter-banker lending and borrowing, the People's Bank of China regulate the excess capital reserve of the system of the bank by policy instruments, thus influence the interest rate of inter-banker lending and borrowing indirectly. Theoretically, the interest rate of inter-banker lending and borrowing, regarded as the property price of the short-term loan market, have reflected the policy orientation of central bank. So, consulting the relatively ripe policies of interest rate rules abroad to analysis the operating of monetary policy in China and studying the response to change of inflation and output gap of of the short-term nominal interest rate is essential. This paper uses the Inflation-Forward Based Taylor Rule to examine the short-term nominal interest rate of our country. On the basis of analysing about the coefficient and the mechanism of interest rate in China, we draw conclusions under the condition of interest rate control. Chapter 1 analysis the role and function of the interest rate in view of mechanism of the monetary policy and intermediate targets mainly. And summarize monetary policy rule. Keynes pay attention to interest rate role in monetary policy and advocate the monetary policy of the positive and discretion. Quantity Theory advocate final targets of monetary policy price steady and the Central Bank should implement " the single rule ". Most national central bank approve the opinion of Keynes at present and the monetary policy is important to economy as the main policy instrument for government to control the economic. As to the degree of suitable of interest rate as intermediate target, the research of McCallum shows the interest rate is a behavior index of monetary policy better than monetary supply. Taylor thinks policy rule is a general base on which policy instruments are adjusted to change of the economic. policy rule should be the datum or basis that the monetary policy is made , but not the unalterable criterion strictly observed. Chapter 2 is about policy rule theory of the interest rate and the operating of interest rate policy of our country. Since the 1990s, research of policy rules can be divided into two kinds. First, Taylor rule, describe the short-term nominal interest rate reacts on inflation rate and output gap. Taylor investigated FOMC monetary policy operating and drew the conclusion that FOMC operate on base of Taylor rule. Second is IFB rule, which is essential a forward Taylor's rule. Clarida, Gali and Gertler (1999) have proposed IFB rule. Levin, Wieland and Williams (2001) have put simple forward IFB rule --Simple LWW rule. Laxton and Pesauti (2003) set up one simple IFB rule by model GEM and estimate the equation not on real interest rate but put more greater on anticipated inflation. Chapter 3 use the simple Taylor rule and IFB rule to analysis the operation mode of interest rate policy in China. Use the simple Taylor rule to calculate the rule value of China at first. The simple Taylor rule can be described as: r t = 3 + πe t + 0.5( πet ? 4 )+ 0.5yt Rule value and real value do not fit well, indicating that simple Taylor rule is not suitable to China in some extent. The reason lies in simple Taylor rule assume short-term nominal interest rate respond to inflation change four period lagged and output gap while have not considered the level and smooth behavior of the interest rate and inflation anticipation. Then we use simple IFB rule to set up a new equation. We consider the smooth behavior of interest rate on base of simple Taylor and introduce the anticipated inflation rate. We Adopt GMM to estimate the equation and choose instrument variable as lagged output gap, interest rate, inflation rate and increasing rate of real GDP. The equation is designed: ( ) ( )4 4 41 t 11 1 t 1 t0.04t tti i Py+ + ? = ρ?? + ? ?? + β??? P+? ??? + γ+εThe estimation result of the equation indicates the Forward-Looking Taylor rule can offer a reference. It is comparatively smooth that the interest rate of our country is adjusted and the fluctuating range is relatively small. The central bank consider the previous interest rate level more in interest rate adjustment. After the short-term loans market let go of, short-term nominal interest rate respond to inflation anticipation strongly. It was not enough of to the output gap that interest rate in China was adjusted before 1996, and the response to output gap in China was strengthened after 1996. The weight of Inflation gap and output gap reflect Central Bank evaluating the double targets of price stability and economic growth. The coefficient of the output gap is greater than that of the inflation, proving that the People's Bank of China pays more attention to output steady rather than inflation.