Reconstruction Of The Inflation Targeting Regime And China's Monetary Policy Framework

Inflation-targeting is a monetary policy framework emerging in the early 90s of 20^th century. According to this framework, the central bank release specific inflation target value (target zone) for one or several periods and acknowledge the major long-run objective of monetary policy is keeping low and stable inflation rate. Based on the extensive assessment of the indicative information of many factors which influence the potential level of future inflation and the anticipation of the inflation trend, the central bank will compare the anticipation with the selected inflation target to find the gap according which the monetary policy is adjusted to align the actual value of inflation with the selected one. The systematic change originating from the severe pressure of inflation, the invalidity of money supply target and the strengthens of the independence of central banks forces more and more countries and regions give up traditional monetary policy framework and turn to inflation targeting. Actually, the policy of inflation targeting contributes significantly to the lower rate of inflation, stable price, improvement of economic environment, the economic growth and the improved public confidence in government.As far as the facts of China is concerned, it is very insufficient taking the money supply as mediate target for monetary policy. From this perspective China should change her thought and seek for new mediate targets as well as other monetary policy framework. The current conditions of stable macro-economy, sound fiscal situation, smooth development of finance, and the improvement in the dependence of central bank and the transparency of monetary policy indicate that China has the prerequisites to implement inflation targeting. Under such favorable circumstance China should adopt inflation targeting as early as possible to take the place of existing monetary policy framework.This paper has the following uniqueness and innovation:ⅠThe optimum inflation rate level of 2.5% is estimated by utilizing the time-varying parameter model which should be regarded as the inflation target value of China.ⅡEmpirical test is conducted on the causal relationship between price trend and money supply using the technique of Granger causality tests with the conclusion that money supply is unfit for being taken as the mediate target of the policy of China based on available data.