The Research Of Monetary Policy Rules And Empirical Analysis In China

Since 2007, the People's Bank of China has implemented a series of monetary policies with increasing frequency compared to the past, in response to the negative impact on our economy, which is resulted from excess liquidity and the international financial crisis. However, the intention and effectiveness of the policies are controversial among the financial and alchemical circles. Especially in the first half of 2008, with the initial impact of the global financial crisis, relatively tight monetary policy was widely questioned. It has been still obscure whether China's monetary should be implemented discretionarily or just following certain rules. Thus it will be an important problem for the academia and the government departments of economic management to reconsider that how to make and implement the monetary policy for regulating and controlling the operation of the national economy.In the theoretical aspect, the implementation of monetary policy can be discretionary or following policy rules. In history, there have been lots of controversies on pros and cons of the two modes:the relatively high flexibility of the discretionary one makes it deal well with unexpected shocks of the economy effectively, but monetary policy effects are often unsatisfied because of the time inconsistency of monetary policy, inflation bias and the stability bias. It is more serious that frequent operations of the monetary policy can weaken the public confidence of the monetary authorities' ability, hurt the reputations of the authorities, as well as lead to a long-term invalid monetary policy eventually; Monetary policy implemented by regular rules with high transparency can enable market participants to understand the intentions of the monetary authority, so as to influence the market players' expectations, which will not only guide the behaviors of entities on a micro level, but also avoid the discretions caused by discretionary monetary policy. However, due to the lack of flexibility, the later one will be useless when facing the unexpected strong shocks. Also its execution problems are obvious, especially with the failure of designing accordingly effective rules. In a word, the main issue on the two methods is to find a best way to balance the flexibility and transparency, so to make the monetary policy more scientific and effective. Based on the relations between macroeconomic situation and monetary policy effect in recent China, the paper analyzes the advantages and disadvantages of the two methods. In the first part of the thesis, according to the classifications of macro-economic models, the key issue is on the equilibriums of the two different monetary policies in the traditional and modern frameworks, with the conclusions of three major shortcomings about discretionary monetary policy, namely the time inconsistency of monetary policy, inflation bias and the stability of the bias, so as to provide a strong theoretical support for implementing monetary policies by regular rules. Unfortunately, policy rules consistent with the theory fully are unrealistic in practice. Therefore, studying the similar simple rules seems more meaningful. In the second part, a more detailed theoretical analysis on the three simple rules which are Friedman single rule, McCallum rule and the Taylor rule was made. Considering the limited length of the thesis compared with numerous extended forms of the rules, the author only discussed the basic form of the three rules without affecting the basic conclusions. Through the theoretical analysis, a preliminary conclusion is made that the Friedman single rule is only for theoretical studies because of its simplicity, while the McCallum rule and the Taylor rule may have a relatively strong practical value. In the third part which is the central part, the empirical analysis is made by comparing the selected major economic indicators related to the Taylor and McCallum rules and applying cointegration theoretical analysis on the adjusted economic data in China. The basic conclusion is that the McCallum rule is more consistent with China's economic situation.Based on the above empirical findings, a long-term McCallum rule cointegration equation and an error correction model are made by collecting China's macroeconomic data. The statistical indicators show that the model is effective and stable. Finally, based on theoretical and empirical conclusions, some advice on designing and implementing monetary policies in China is raised.