An Empirical Study Of China's Monetary Policy And Inflation Relationship

Inflation is an important aspect of macroeconomic, and it has directly affected on economic development and social stability. Because monetary unbalance is the main cause of inflation, monetary policy is the significant means to control inflation. Intermediate targets of monetary policy are the connection points between monetary policy instruments and final targets, which are very important to policy control effect. Discretionary monetary-policy has an inflationary inclination because of time inconsistency. So it is ever difficult to control monetary supply. At the same time in the modern financial surrounding, public expect is dispensable in monetary policy processing. Traditional intermediate targets of monetary policy can not obtain public desired results, but also mislead the public expect of monetary policy and other financial variable, which contributes to opposite results of monetary policy. So it is necessary to abnegate the traditional intermediate targets of monetary policy. Inflation-targeting regime can not eliminate the inflationary inclination and but easily be executed in practice above all. It may be an optimal monetary-policy rule in the future.In recent years, the research on both the asymmetry of the effect of monetary policy and its effect on inflation has raised great concern abroad in domain of finance. Simultaneously, the effects of contractionary and expansionary monetary policy differ from each other significantly when coping with the overheated and recessionary economy, which was authorized by mainstream economists. Paolo Surica (2004) belief nonlinearity is a robust feature of US monetary policy rules only before 1979 and with respect to the output gap, and this implies an average inflation bias during the 1960s and 1970s but a value not statistically different from zero over the last two decades. The asymmetric effects of monetary policy in China have been proved in much previous research. Unfortunately, previous research did not mention the form of loss function, which had very important effects on forming optimal and nonlinear response rules and in parameter estimation.With the targeting function defined by the forward-looking structure of the economy and non-quadratic loss function, we obtain the optimal and nonlinear response rules. By using nonlinear generalized method of moments (NLGMM), we contrast the results of reduced-form and structural estimates of central bank first order condition (Eular equation) under the framework of asymmetric preference and nonlinear response rules. Through a simple device, this paper gives a discussion on the inflation bias. The research result contains three aspects of information: firstly, we form an asymmetric loss function, which nests the quadratic form as a special case; secondly the result indicates asymmetric preference of nonlinear monetary policy response rules from the first quarter of 1993 to the first quarter of 2006; finally asymmetric preference of central bank contributes to the inflation bias. These conclusions have directly referenced and instructional significance for improving macroeconomic regulation and control and for framing forward-looking monetary policy.