The Analysis Of Exchange Rate System's Effect On Monetary Policy In China

As one country's external price, exchange rate is an important policy tool of macro control. As one important part of monetary policy, it influences one country's ability to fulfill the objectives of monetary policy. Monetary policy is one of the important national macroeconomic policies and an essential tool of regulating macro economy and stabilizing currency.In 1994, the official exchange rate and exchange swap price were officially combined and our country began to use the floating exchange rate system, which is single, managerial and on the basis of market supply and demand. RMB exchange rate which actually pegs to the US dollar was a temporary measure of the response of China's government system to the Asian financial crisis in 1997. On July 21,2005, the central bank of China announced that China began to implement a managed floating exchange rate system that based on market supply and demand, with reference to a basket of currencies, and allows the RMB to appreciate against the USD 2%.Exchange rate system has been affecting China's monetary policy effect. Especially in recent years, along with the increasing in reserves and the foreign exchange as a representative of the central bank bills in sterilizing intervention policies, the monetary policy effect is more complex. Along with closer relationship between China and the world economy, China will eventually open financial markets, which means that the exchange rate will take more effect on monetary policy and the influence the economic equilibrium. So studying the impact of exchange rate system on monetary policy has practical significance to realize national economy, and is very important for the internal and external equilibrium.This paper combines the normative and empirical research method. With the combination of actual situation in China and Mundell-Fleming model, we study the system of china and effect of exchange rate system on monetary policy,then find the right interest rate, foreign exchange rate system that are suitable to China.The paper discusses the transmission mechanism of exchange rate's impact on monetary policy. From July 21,2005, China began to implement the managed floating exchange rate system that based on market supply and demand, and with reference to a basket of currencies. Through studying the definition of exchange rate system defined by the International Monetary Fund, we find that the exchange rate system of our country is still fixed exchange rate, although nominally a managed floating exchange rate. Finally, the transmission mechanism is described. The impact of exchange rate regime on monetary policy is mainly achieved by the impact of capital flows on commodity prices and the impact on . foreign exchange reserves.According to the actual situation in our country, we do some correction and analysis of the classical M-F model. Interest rate system and capital control system were analyzed; we get the conclusion that our country's interest rate is based on the market to some certain and china's capital controls are not completely liquidity. On this basis, we modify the M-F model, then we find that the monetary policy is effective but abate effect. The main reason is to sustain the stable exchange rate, on other words, Our current exchange rate regime is one of the important reasons of weakening effects of monetary policy. But the weakened monetary policy mainly depends on the currency supply that the central bank maintain stable exchange rate. Then we introduce sterilization intervention and analyze the effectiveness of monetary policy under the existing sterilization intervention circumstances. The final results showed that sterilization intervention weakened the weakening effects of exchange system.Then I use the empirical analysis method to verify the effect of Sterilized intervention on monetary policy under fixed exchange rate system. We establish a multi-element linear regression equations and verify the positive correlations between the money supply and Funds outstanding for foreign exchange. In the end, I put forward the corresponding policy recommendations, including interest rate marketization, etc.The main innovation of this paper is that we use the combination of the standard and the empirical analysis, and the combination of the theoretical and practical method to discuss the impact of exchange rate system on monetary policy. The deficiency is the empirical analysis is too simple, the variables selection is insufficiently rigorous and the suggestions are superficial.