The Taylor Rule And Its Test In China

With the trend of marketization of our economy, the adjustment function of monetary policy to macroeconomic is more and more prominent. Still there are a lot of problems about how to adjust economy through monetary policy. This paper started from the study of Taylor Rule, applied Taylor Rule to test our country's monetary policy, then got the conclusion that interest rate should be the monetary policy medium target in the future.Taylor Rule was first proposed By John. B. Taylor (1993). He suggested that there exist corresponding relation between inflation and real equilibrium Federal fund interest rate when natural unemployment rate and potential output are given. That's to say, Federal Reserve can accommodate interest rate to stabilize inflation and output gap. Taylor Rule provides theory foundation for American monetary policy practice from 1993, when U.S swerve to interest rate as its monetary policy medium target. More researchers and monetary authorities' attention is attracted by the success of U.S monetary policy recent years, so is the study of Taylor Rule.This paper is organized as followings: Chapter one introduced the origin of Taylor Rule, Taylor Rule's basic model and its recent development. Money growth rule and its relation to Taylor Rule were also presented in this chapter for its similarity in spirits to Taylor Rule. From Chapter two we began to analysis monetary policy in our country. Chapter two applied Taylor Rule's basic model, tested interval quarter data from 1992 to 2001 and from 1996 to 2001, discovered the derivation of monetary policy in our country. The conclusion demonstrated that Taylor Rule could provide a benchmark for interest rate adjustment to macroeconomic. This chapter also compared the test results between 1992-2001 and 1996-2001, showed the process of marketization of interest rate and the enhancement of relation between interest rate and economic growth.Chapter three applied Taylor Rule's expansion model, test the money growth rule's applicability in our country. The results demonstrated output gap coefficients were not significant both in interval of 1980-2001 and in interval of 1996-2001, which was an brilliant comparison to the output gap coefficient significant in interest rate rule in the same period. This illuminates the descended of effects of money supply on economy and the ascended of interest rate's influence on economy. Thus, we can draw the conclusion that monetary policy medium target should shift from money supply to interest rate. But the weight should be given to money supply in monetary policy, should realize coordination of interest rate policy, money supply policy and exchange rate policy, avoid the conflicts of these policies, which would weaken the implementation effects of monetary policy to economy.