A Study On The Practicality Of Taylor Rule In Chinese Monetary Policy

Which is more appropriate for the intermediate index of monetary policy, interest or currency supply? Should it be performed according to the rules or on the basis of disretion? These are the two controversial issues both in the theoretical field and the authorities concerning monetary policy.The monetary policy established in 1996, which takes currency supply as its medium index, deviates to a great extent from the goal of monetary policy in relativity and independence owing to the influences of the Central Government's exchange policy, the Commercial Banks' demand of profits, the local government's investment impetus and the state-owned enterprises' operating mode. Interest, as a signal of assets' price, is considered, among all the factors that may infuence price and economic development, as the only variant that can maitain a long and stable relationship with price and economic development. Its flexibility, measurability have been increasingly appealing to monetary policy makers.Adopting cointegrating VAR, this thesis proves the long and stable relationship among intrerest, inflation gap and production gap and esitimates the concrete forms of Taylor Rule after the year of 1998. Testing results demonstrate that Taylor Rule can describe the specific tendency of InterBank Offered Rate in our country, and it can function as the basis for the monetary policy of the Central Bank.In the present economic operation, the gradual perfection of policy goal, exchange rate policy and transmission mechanism have paved the way for the application of Taylor Rule in China. With the promotion of interest reform, interest will play an even more important role in monetary policy making in China.