Taylor Rule In The Applicability Analysis And Inspection

In recent years, the practice of controlling the money supply shows that taking money supply as the intermediate target is not satisfied for its controllability, measurability and relativity. According to China's economical and financial development, taking interest as intermediate target is better than money supply. At present, Taylor Rule has been widely used in macro economical model's practice and study. The foundation of Taylor Rule is that when the monetary authority carries out the monetary policy, they should follow the rules, which are adjusting the trend of interest rate according to the differences between the actual value and the rule value of inflation rate and GDP gap.The paper reviews and discusses the traditional Taylor Rule. It introduces the policy, development and premise of Taylor Rule. The paper also summarizes the effect and results of the USA where Taylor Rule has been put into practice for years.The paper mainly focuses on the applicability in China. The analysis shows that China fits the premise and Taylor Rule can instruct the establishment, performance and monitor of the monetary policy. The paper also discusses the relationship between Taylor Rule and inflation target and etc. It also covers the evaluation of the GDP gap in the model.In the paper, we use the Johanson-cointegration Test to test if the inter-bank borrowing rate has long-run trend in the model. After that, we estimate the equation of Taylor Rule in China. The results show that there exists long -run relationship among the five variables tested, so the traditional Taylor Rule can be used in the description of Chinese inter-bank borrowing rate's trend. We consider the expected inflation rate and refine the model.According to the analysis and results of the Johanson-cointegration Test, we can see that there are still a lot of problems when we use Taylor Rule. The most important one is that we must speed up in the interest rate marketization. We should also deepen the reformation of the foreign exchange rate. At last, the paper introduces the revelation of Taylor Rule and points out that China should construct its own monetary policy in the framework of Taylor Rule and use it wisely.