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Effectiveness Of Monetary Policy In An Open Economy

Posted on:2005-05-22Degree:MasterType:Thesis
Country:ChinaCandidate:Y CaoFull Text:PDF
GTID:2206360122994091Subject:Political economy
Abstract/Summary:PDF Full Text Request
As a major tool in regulating macro-economy, curbing inflation and promoting economic growth, monetary policy is always of great importance to governments and scholars. From 1980', with the institutional change of the global financial market, governments of each country gradually loosened the control over financial and foreign exchange market, which accelerated the process of merge and unity of domestic and foreign market. In the same time, under the new international monetary system, the variety of foreign exchange arrangement restricted the efficiency of domestic economic policies in maintaining internal and external stability. While the innovations in computer and information technology accelerated the movement of international capital and the emergence of various derivative financial tools greatly shocked the independence of economic policies in an open economy. The interaction of all the abovementioned factors influences the independence and effectiveness of a country's monetary policy. In the preface of the paper, the monetary theories of Keynes, Monetarism and Rational Expectationism will be summarized, and the transmission mechanism through investment, consumption and export to the macro-economy will also be generalized.The first part of the paper will discuss the process of financial institutional change and the merge of international financial market in the scenario of technology advancement and financial efficiency improvement under the framework of an open economy. The increased uncertainty in money demand weakened the relation between traditional monetary policy, whose intermediate target is basic money and interest rate control, and macro-economic variables. Currently, more and more countries turn to inflation control as nominal anchor to realize economic stability. But because of the uncertainty of monetary multiplier, inflation control has an intrinsic tightening effect. The central banks usually face dilemmas when setting the optimum inflation rate. On the one hand, dynamic inconsistence weakens the credibility of single rule, while on the other hand; the discretion of the central bank will cause greater loss of economic welfare.The second part of the paper will first introduce financial asset price control into the range of monetary policy so as to reveal the non-linear Taylor's Rule in policy making and point out that the volatility of financial asset price will increase the difficulty of intervention by central bank.Secondly, the paper analyzes the possibility of realizing stable investment and consumption with the emergence of financial derivative products and their influence to the expected effect of the monetary policy. Finally, the decisions of families and enterprises, the prices on product and labor markets and the wage rigidity will all cause asymmetry in aggregate supply regulation.The third part of the paper discusses the combination and coordination of monetary, fiscal and foreign exchange policy in an open economy. In this part, Tinbergen's Rule and Mundell's Assignment Rule will first be introduced. And then the relative independence of each policies and the possibility of the convergence route to the equilibrium value will be discussed theoretically. Further, the effectiveness of various policy combinations will be discussed under the background of foreign exchange arrangement in the international monetary system, the time-lags of monetary policy and the deficit monetarization in developing countries.The fourth part of the paper will analyze empirically the choice of intermediate target, the correlation between monetary policy and the price of financial asset and the combination of policies in Chinese macro-economy so as to put forward some suggestions accordingly.
Keywords/Search Tags:monetary policy, intermediate target, uncertainty of financial market, combination of policies.
PDF Full Text Request
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