Inflation Targeting And Applicability In China

The traditional monetary policy is regarded as the hard dilemma ---- one have to find the optimal compromise point between inflation and the fluctuation of economy.Under this framework, the monetary policy authority tries to make use of the short-term effect of monetary policy. There are two serious disadvantages with the traditional way of analysis and the monetary policy authority's behavior. First, due to the lack of the research on the function money performs in the economy; the Philips line had been over-relied, which is just a statistical result, lack of the support by any theory. And the opposite relationship between inflation and the fluctuation of economics is very unstable.Second, the traditional approach is lack of the analysis on the interest and behavior motivation, and furthermore the structuring of the framework & criterion behavior of the monetary authorities. The analysis of the dynamic consistency of the monetary policy is also lacking.In the 1990s, the booming of inflation-targeting framework lead the practice and research of monetary policy to the new direction brought new clue. The results showed the new policy was relatively successful in practice, which could be especially proved by the experiences of the countries that have undergone high inflation rate.The most conspicuous feature of inflation-targeting policy is that it highly unifies the rule rigidity and flexibility, which is the"flexible decision under restriction". The central bank must always maintain the inflation target once it is fixed.Meanwhile, the central bank is of flexibility while dealing with unexpected domestic or foreign impact. What's more, inflation-targeting framework has been theoretically proved to be dynamic consistent.