A Research On The Effect Of Chinese Exchange Rate System Reform To The Effectiveness Of The Monetary Policy

According to Mundell-Fleming Model theory, the monetary policy in China will beeffective with the gradual relaxation of capital items controlling and managed floating exchangerate system referring to a basket of currencies. However, it is not sure that the economic status inChina can be consistent with the Mundell-Fleming Model. It is becoming one of top issues thathow the monetary policy affects the economy around the period of exchange rate systemreforming in July 2005.Comparing the assumptions in Mundell- Fleming Model with Chinese reality, this paperreasons that there are deviations between the model and our economic situations and the modelcan not be applied directly to our country. With a framework of Dornbusch Over-shooting Model,this thesis attempts to research the problem from a new perspective of actual examination bycollecting the data of China and USA in two ears after the reforming of the exchange rate system.The author draws conclusions that there is causality between the exchange rate fluctuations andmonetary policy in China, and estimates the extent of correlation between the exchange ratefluctuations and the money supply. Meanwhile, the thesis studies the relations between themoney supply and the gross domestic product and consumer price index by applying the methodof Granger causality test, and draws a conclusion that the monetary policy is still effective inChina with relaxing capital items controlling and the managed floating exchange rate system,But compared with the validity of monetary policy before the exchange rate system reforming,the effectiveness of monetary policy is becoming lower. At last, the author analyzes the reason ofthe ever-weakened effectiveness of monetary policy according the China's reality.