Taylor's Rule In The Condition Of Financial Globalization

Economic globalization makes the economic interdependence between nations more closely. Financial globalization, as an important component of economic globalization, has a great impact on the global economy. The development of financial globalization makes the world's capital markets closely integrated, which might bring opportunities as well as unprecedented challenges. On the one hand, it improves the efficiency of the global allocation of capital; On the other hand, it makes the financial turmoil happened frequently which may have an enormous ripple effect and amplification effect. Such as the U.S. subprime lending crisis made the risk spread from the real estate markets to the credit markets, capital markets, from the financial sector to the economic field, and spread to other countries through investment channels and capital channels. In China's financial opening up process, a large number of foreign funds, either directly or through the establishment of financial institutions in our country indirectly flows into China. It has created a significant degree of influence to the efficiency of monetary policy tools which our country used at the present stage. In short, as a lot of abroad money through foreign financial institutions entering our country, the existing monetary policy instruments'direct effect of the coverage has been shrinking, its effect has been weakened to a certain extent. In turn, the implementation of China's monetary policy effect also been affected.At the same time, fluctuations of asset price has become a major factor of affecting a country's economy, especially the asset prices has played a very important role in the economic cycle. The fluctuations in asset prices have brought great difficulties to monetary policy decision-making and implementation. In particular, the stock market and monetary policy interaction has been repeatedly proven in historical events, such as the 2000 U.S. stock market has dropped sharply, the Fed lowered interest rates more than 10 times. Although the reduction in interest rates is not entirely against the stock market, but if there is no timely regulation of monetary policy tools, the stock market fluctuations may become more severe.This article is based on the background of financial globalization; and use Taylor rules to fit the domestic monetary policy, while considering the foreign capital into the Taylor rule model for the first time. It means add the condition of the foreign stock markets to the framework of China's currency policy formulation. I use co-integration model and GMM (generalized method of moments) regression methods to study how fluctuations in the foreign stock market affect domestic monetary policy, add Dow Jones industrial average index's volatility and Nikkei stock average index' volatility as the representatives of the condition of foreign stock market to the Taylor rule model for analysis. Its conclusion is certain:The forward-looking monetary policy reaction function joining the stock market volatility can be a good description of the trend of China's inter-bank lending interest rate. The response coefficients of the stock price volatility can pass the significance test, indicating the volatility of foreign and domestic stock market has significant impact on the domestic monetary policy. So adding the volatility of stock marker to the framework of China's monetary policy is very reasonable. So when our country make the decision of monetary policy, considering the conditions in foreign stock markets is very necessary, which not only provides a reference direction for China's monetary policy-making, but also can make solutions to many problems which are brought by our country's closed mode of monetary policy while facing the trend of financial globalization, so the formulation of monetary policy are more effective and reasonable.