| Among the multiple instruments to adjust and promote our country's development of economy, monetary policy is one of the most important tools. Through many years'practice, our central bank's ability of employing monetary instruments has been increasingly more proficient, and has adjusted macroeconomic effectively by applying monetary policy. However, as the degree of China's opening to the world deepens, the effectiveness of the monetary policy has been reduced. For example, the expanded policy failed to control deflation while the tight policy by raising deposit reserve rate failed to restrain the trend of economic over-heat. Various factors can account for the situation. Among them the exchange-rate regime is the most important one.This essay consists of five chapters:Chapter one is the summarization of China's exchange rate regime and the autonomy of the monetary policy. Firstly, this chapter reviews the history and features of China's exchange rate regimes from 1953 to 2005. Secondly, it gives definition of the autonomy of monetary policy and its difference from the effectiveness of monetary policy. Finally, it describes the channel of how the fixed exchange rate regime affects the autonomy of the monetary policy.Chapter Two gives the theoretical foundation of the conflict between exchange rate regime and monetary policy. According to Mendell—Fleming Model, no matter how violent international capital flows, the conflict between fixed exchange rate regime and monetary policy will exist. The Incompatible triangle of Krugman shows that these three goals: fixed exchange rate regimes, free capital flow and the independence of monetary policy can not be attained at the same time. And the extended incompatible triangle gives the foundation for the developing countries'exchange rate regimes.Chapter Three describes the influence of the exchange rate regime brought to the autonomy of the monetary policy from all aspects. Under the opening economy condition, the exchange rate is not only a variable that affects the trade revenue and expenditure, but also become an important variable that affects macroeconomic policy of a country, international balances of payments, the domestic price level and the employment. Exchange rate regime affects the monetary policy's ultimate objective, and the currency supplies are not easy to control because that our country forces to complete a sale collects and has an obligation to keep the exchange rate stable .The foreign exchange occupation becomes the main channel of the currency supply. The massive foreign exchange occupation has changed the structure of the currency supplies and the conduction process of the monetary policy, and has increased the operation difficulties of the monetary policy. These all take effect to the autonomy of the monetary policy directly or indirectly. In addition, the present exchange rate regime has also weakened the interest rate conduction mechanism, and hindered our country's marketability advancement of the interest rate.Chapter four, which is the key chapter, is the demonstration study of the autonomy of the monetary policy. Since the 1990s, our country's monetary policy has gone through three stages; I simply analyzed and appraised them. In the process of capital and financial account liberalization, in order to maintain the exchange rate, the autonomy of the monetary policy is under intense impact, the monetary policy and the exchange rate policy has had three obvious conflicts: During 1994-1996, there was a conflict between restraint of inflation and appreciation of RMB. To cope with conflict, the central bank took measures such as taking back loans from commercial banks. But this didn't work very well because of the random of the balance of payment and the planned loan. The conflict between the deflation and the depreciation of RMB occurred during 1997-2000. The central bank mainly took open market operation to handle the problem although such measure was not so effective that domestic money supply decreased. The conflict between inflation and appreciation of RMB recurred during 2001-2005. The central bank had to issue new central bank drafts for lack of bonds in the monetary market. In spite that the new central bank drafts do slow the increase of monetary base to some extent, stabilized exchange rate and controlled inflation still can't be achieved at the same time. Afterwards, I used the currency supply M2 to represent the autonomy of the monetary policy, and selected variables including foreign exchange occupations, the interest rate, bank reloans and the open market service and so on, to verify that the currency supply is mainly influenced by the foreign exchange occupation by Eviews. I obtained the conclusion that along with the deepening of the economy opening degree and the enlarging of capital circulation, if our country maintains present exchange rate regime, the autonomy of the monetary policy will be a frailer.On the foundation of the conclusion drawn from chapter four, chapter five puts forward corresponding proposal to enhance the autonomy and effectiveness of the monetary policy. On July 21st, 2005, People's Bank of China announced that managed and flexible exchange rate, which is referred to currency basket and based on demand and supply in the market will be put into effect in China. Such improvements coordinate the conflict between exchange rate regime and monetary policy to some extent and a more flexible mechanism of exchange rate regime provides monetary policy larger operation space. However, the conflict between the two policies reflects a paradox that cannot be avoided even in developed countries. Thus at the end of this thesis, several measures are proposed, hoping to make some contributions to the practical operation in China.This essay is completed after nearly one-year research and study of the exchange rate regimes and monetary policy. Although there are many essays discussing the conflicts between the exchange rate regime and the monetary policy or the effectiveness of our country's monetary policy. In this essay, I try to analyze the impact posed by exchange rate regime to the autonomy of the monetary policy and give solutions to the problem. This can be defined as a kind of innovation. In addition, I collect lots of data and verify the autonomy of the monetary policy through positive analysis. Due to the limitation of my knowledge structure, there exists many demerits in this essay; some research to some point is not deep enough. Welcome to point out. |
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