Applicability Analysis Of Inflation Targeting In China

The development of macroeconomics and national practice are sufficient to prove that the primary goal of monetary policy is to maintain price stability, the price stability-oriented monetary policy runs through the entire development and the practice of history of the theory of monetary policy. In the past ten years, the inflation targeting as a new monetary policy framework has made rapid development, along with the in-depth study of the monetary policy framework. Our country is based on the amount of money supply as the intermediate target of monetary policy framework, but with the financial innovation and the development of financial markets, monetary policy framework is facing more and more challenges. This paper aims to analyze the inflation targeting applicability in China, and analysis some problems about the inflation targeting.In the use of the exchange of rate or the money supply as an intermediate target of monetary policy. These countries encountered insurmountable problems, many countries turned to the Inflation Targeting monetary policy framework. In1990, New Zealand advocate and implementation the monetary policy framework firstly and then many countries given up the original exchange rate targeting or money supply targeting in favor of Inflation Targeting, which achieved good performance in curbing inflation and promoting economic growth. So far, there are nearly30countries adopt this monetary policy. With the development of the financial markets, and the weaken of the stability between the supply of the money and prices, the effectiveness of monetary targeting will be lower and lower, so more and more scholars began to look for other monetary policy framework which can be substituted. Inflation Targeting monetary policy framework is one of choices. Therefore, this thesis will analysis the applicability of Inflation Targeting in China.Firstly, the connotation of inflation targeting, its basic elements as well as the classification are described, and then the paper compares the inflation targeting and the other two targeting. Next, according to the successful implementation of inflation targeting countries experience, the design of the framework, the specific operation and the attention should be paid to the problem are detailed overview. In order to analyze whether inflation targeting is suitable for China, establishing the error correction model to analyze the effectiveness of monetary policy in China. The results show that either M1or M2as the intermediate target of monetary policy in China, the validity of the correlation between the money supply and the price is very low, the money supply as an intermediate target of monetary policy in China exists some problems. Due to the implementation of interest rate control, interest rates as a tool of monetary policy in China subject to certain restrictions. China’s exchange rate formation mechanism has not yet fully market-oriented, so exchange rate plays a limited role in the monetary policy transmission mechanism. Inflation Targeting has strong endogeneity, price movements are mostly caused by itself, which proved the necessity of the implementation of Inflation Targeting in China.According to the basic conditions required for the implementation of inflation targeting and our current basic status, to analysis the favorable and unfavorable conditions for the implementation of inflation targeting, we can get the result that our country can implement the preliminary inflation targeting. In order to be able to become a formal inflation targeting countries under the existing institutional constraints, we should design a transition program with international experience to be a initial inflation targeting countries in the short term.