Effects Of Monetary Policy And Exchange Rate Regime Reform In China

In order to achieve economic goals such as stabilization of price, growth of economic, equilibrium of balance of payments, stability of financial markets and so on, the People's Bank of China have laid and implemented monetary policy and exchange rate regime since 1983 when the PBC had firstly independently exercised central bank's functions. There is a transmission process during implementing policies. Monetary policy influences price level and national income level through money aggregates, and exchange rate regime reforms influences balance of payments and economic growth through spot exchange rates and forward exchange rates. The effects of implementing policies on intermediate goals and ultimate goals include effectiveness, results and efficiencies. The existing research of monetary policies which always focused on effectiveness and results rarely emphasized on efficiencies, and the research of exchange rate regime reforms which always focused on effects on the real economy and mechanism of exchange rate determination rarely emphasized on expectation of exchange rates.In our research, we emphasize on analysis the efficiency of monetary policy and effects of exchange rate regime reform on expectation of exchange rates. We also analyze the conflictions between monetary policy and exchange rate regime in terms of theory because these conflictions would weaken the effects of implementing policies.We analyze the efficiency of monetary policy in China by using the stochastic frontier analysis. According to monetary transmission theory, central bank could influence money aggregate, production level and price level through employing monetary instruments. We investigate the output efficiency of money aggregate and real gross domestic production influenced by monetary policy instruments as input variables as well as the corresponding factors affecting efficiency. The conclusion shows that monetary policy in China is efficient for it can promote economy effectively; financial innovation and economy cycle are the two factors which would affect the efficiency of monetary policy. On July 21st 2005, People's Bank of China announced that a managed floating exchange rate system based on market supply and demand and pegged a basket of currencies came into effect from that day. To perfect this system, the Bank has adjusted three times from 2006-2007. By using event study, we investigates the impact of these reforms. Semi-parameter regression model is used to estimation normal forward rates over event window. T-test and Wilcoxon test are used to prove the impact of reforms. The conclusion shows that the reforms of exchange rate system cause noticeable effects in forward rates. That is these reforms influence the expectations in market remarkably.We analyze the conflictions between monetary policy and exchange rate regime in terms of theory. The conclusion shows that exchange rate regime is not the main factor which could weaken the independence of monetary policy. Therefore, there is unnecessary to give up the stabilities of exchange rate in order to reach the goal of monetary policy independency.By analysis these problems, we conclude that People's Bank of China could employs various policies efficiently and is rather independence. The monetary policies and exchange rate regime reforms are expected to be maintained and be brought into a unified goal structure by People's Bank of China.