Research On The Effectiveness Of Monetary Policy Under Different Exchange Rate Regimes

Implementation of monetary policy is closely related to exchange rate regime in a country’s macroeconomic operation. On July 21,2005, China’s exchange rate regime changed from pegging to the dollar to the real managed floating. Then, with more and more market-oriented exchange rate regime in China, the elasticity of exchange rate fluctuations has been effectively improved. Therefore, Comparative study of the implementation of monetary policy under two different exchange rate regimes between pegging to the dollar and the managed floating has been done in this paper. Whether the effectiveness of monetary policy is improved as well as how to more effectively improve it accompanied by the change of exchange rate regime is also studied in this paper. These studies have important theoretical and practical meaning.There are five parts in the paper. The first part introduces the purpose of the topic, significance, literatures, research methods, innovation points and so on. The second part comparatively analyses the implementation of monetary policy in China from 1994 to 2011 which is divided into two parts of pegging to U.S. dollar exchange rate regime and managed floating exchange rate regime. Apparent conflicts had occurred between implementation of monetary policy and exchange rate regime in the three stages of pegging to the dollar part. But there is not apparent conflict between implementation of monetary policy and exchange rate regime during managed floating part. Subsequently, the paper gives a theoretical explanation to the facts of monetary policy in two parts from the perspectives of Mead conflict, the Mundell-Fleming model, monetary model. The third part gives a further comparative study to monetary policy under two different exchange rate regimes. The study concludes that the effectiveness of China’s monetary policy has been enhanced under the managed floating exchange rate regime through the analysis from the perspectives of monetary policy operations, monetary policy implementation and Trilemma. The fourth part develops VAR models to do empirical study by using the 1998-2011 monthly data of China and analyses the relationship between monetary policy and currency stability, and between monetary policy and economic growth. The study concludes that monetary policy becomes more effectively in maintaining the stability of the currency and stable economic growth after the exchange rate regime changed from pegging to the dollar to managed floating, and time lag of monetary policy has been improved.After these comparative empirical studies, the fifth part gives suggestions such as further promoting the reform of exchange rate regime, advancing the process of marketization of interest rates according to the conclusions of comparative studies in the paper and the actual situation in China.