Feasibility Study On The Rate As Intermediate Target For China's Monetary Policy

As a bridge, Intermediate target of monetary policy connect the central bank's monetary policy intentions and the ultimate goals.What indicator should we use as intermediate target is of great significance for monetary policy operations. With sustained promotion of financial reform and policies of interest rate marketization, the fluctuation of interest rate becomes enhanced obviously, at the same time, money supply as the intermediate target of monetary policy is faced with more and more doubts and challenges.Is the transition of intermediate target of monetary policy from money supply to interest rate by and large ripe for execution? This paper, based on the successful experience in United states, combined with China's specific national conditions, presents feasibility analysis on the interest rate as the intermediate target.Different economic environment, there are different Intermediate targets of monetary policy in different countries.The process of converting from quantity type instrument to price type Instrument is in main western countries.And now they have diversified options, such as interest rate,exchange rate,inflation and etc. America is typical country which use the interest rate as intermediate target of monetary policy.Intermediate target of monetary policy in china had a process of converting from credit program to money supply according to economic situation.The direct target is actually a product of planned economic mechanism,and the credit program played an important role in planned economic, even it can be used under the special circumstances,however, the credit program is no longer the frequently-used instrument because of the economy mechanism reform.In 1990s,money supply was officially confirmed as the intermediate target of monetary policy in china,which was then adaptable to chinese economic environment and contributed a lot.With promotion of the economy mechanism reform, financial situation has great changes.The controllability, detectability and relevance of money supply is weaker than before, hence, it is of great theoretical and practical significance to study the feasibility on the interest rate as intermediate target for china's monetary policy.Firstly, this paper introduces the basic theories about putting the interest rate as intermediate target; discusses some interest-rate rules which can be used after the intermediate target is confirmed; analyzes the practice which use the interest rate as an intermediate target based on implementation of U.S. monetary policy,and obtaines some general conditions, that is, central bank's independence of the legal status and superior operating skills, and market-oriented interest rate system.Then, in the view of external conditions, this paper puts an emphasis on the effectiveness of the implement of the China's monetary policy. The State Council endows the PBC with the power of a central bank, which is insufficiently independent; Second, PBC's operating skills need to be improved because its predictability is not good enough;Third, the signal of monetary policy under asymmetric information can not be completely effective delivery from the perspective of game theory. Therefore, this paper believes that the external conditions that put the interest rate as intermediate target of monetary policy are not yet available in china.Next,in terms of analysing interior of interest system, this paper studies the feasibility.If conduction mechanism of interest rate is perfect in china,the idea that the interest rate as intermediate target is also not bad. However, through the empirical analysis,this paper gets conclution that interest rate adjustment is effective among financial institutions,but not among the households and firms whose interest rate sensitivity is not big enough.So there is a trend shifting the money supply to interest rates but not dominant. This paper validates the conclution based on Poole Model by empirical work with a part of real data. The results shows that the single money supply indicator is better than single interest rate indicator,and the money supply certainly can't be abandoned.Finally, this paper proposes the policy that is multiple targets mechanism whose core is the money supply, monitoring the interest rate at the same time. In theory, money supply and interest rate can not be monitored simultaneously,while in practice, Germany and Switzerland had the operation of monetary policy monitoring the two indicators together; Although our country now put the money supply as an intermediate target,the controllability, detectability and relevance of interest rate is stronger.Therefore,this paper proposes the money supply as core indicators,and the interest rate as an auxiliary index. We can make use of revised and expanded McCallum rules in practise.For the money supply,we can monitor the central bank and commercial bank's balance sheet, and use the monetary base to make adjustments; for interest rates,we can monitor the 3 month weighted average interest rate of treasury bonds repurchase trading of national interbank market, and use open market operations to make market regulation;besides, exchange rate should be considered in an open economy.