| What monetary policy rules should be implemented in a small open economy under the condition of perfect capital flow? First, the question is that should rules or discretion in monetary policy be carried out? This paper analyzed that the rules and reputation which plays an important role in the monetary policy in the use of game theory and that the public's expectation to inflation should be considered by central bank when monetary policy is established. If the decisions that the central bank made can be expected by the public in advance, the rules are the best choice. If the central bank cares more utility in long terms, the reputation in the public's eyes should be set up and be maintained to the greatest extent. Secondly, exchange rates should be adopted as the intermediate target of monetary policy, which not only satisfy the three requirements------controllability, predictability, and the leading indicator that any classic intermediate targets there have but also can avoid the monetary transmission mechanism being blocked, the exchange rate being overshooted and the international capital being over speculated. Thirdly, through discussing the choice of exchange rate systems in the emerging marketing economies which have the similar circumstances to the small open economies, a kind of rules for exchange rates is strongly recommended. Afterwards, in terms of the run of macroeconomic system in small open economy, I specified an optimal monetary policy rule ------the rule use the exchange rates rather than prevalent interest rates as the intermediate target of monetary policy------which use the frame of rational expectation macroeconomic model for a forward-looking dimension in the premise of perfect capital flow. In addition, the rule possesses not only good features the prevailing policy rules have but also the excellent properties which contains simplicity and lag. Last, adjust to the dynamic equilibrium as a result of commit to the rule is pictured by economic dynamics. |
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