The Effectiveness Of Monetary Policy Analysis

In china, monetary policy plays an increasingly important role in maintaining economy stability. In order to control final targets, like growth and inflation, China's central bank, People's Bank of China should affect intermediate targets, like monetary aggregates, interest rate, and domestic loan. The hybrid system is characterized through the usage of both market-based (price-based instruments) and centralized planned-economy style policies (amount-driven instruments). The centerpiece of our work is analyzing the effectiveness of the monetary policy in China in two ways. One is to assess the monetary policy rulers (one is interest rule named Taylor rule, while the other is money supply rule named McCallum rule), the other is doing dynamic analysis based on New Keynesian Macroeconomic Model, which is in the framework of Stochastic Dynamic General Equilibrium Model to study how to maintain stable economy. Since the financial system is not so developed and incomplete, interest rate channel is ineffective, but interest rate plays a more and more important role when the central bank attempts to stabilize the economy, which in turn offers a room to reform interest rate system. Controlling monetary aggregates is not so good to stabilize the economy, possibly due to the financial deepening and widening. It is more and more difficult to control money supply, and the relationship between money supply and final target is loosed. Domestic loan also is a critical tool of the central bank. Though it is not a market way to use domestic loan, it does can stabilize the economy in some extent, but it also arouses inflation in the medium run and long run. At the same time, domestic loan is not good at maintaining stable economy because of the facts that now in China it is difficult to control domestic loan with the development of financial market. As both an emerging economy and a developing country, it is suitable for China simultaneously to take advantage of interest rate rule and money supply while employing domestic loan as a helpful complement.