Practical Study On The Inflation Pegging Monetary Policy In China

Inflation targeting abandons the past monetary policy and intermediate target such as money supply, it adopts single inflation rate to measure the implementation effect of monetary policy. It is a standard frame for monetary policy, it abandons intermediate target and it is a monetary policy which purpose is merely reduce the inflation rate.Right now China is moving toward a more flexible exchange rate mechanism, however, international experience shows that the floating exchange rate system is easy to make the operation of monetary policy lack of "discipline" and bring serious inflation problems. Recent international practice shows, inflation targeting system is a good option to solve the problem. In the process of achieving inflation targeting system, in order to avoid the time inconsistency issue, the monetary policy rules are necessary. From this perspective, for an economic entity without permanent fixed exchange rate, the composition of the floating exchange rate, inflation targeting and monetary policy rules is a reasonable and sound institutional arrangement.The paper introduces the international implementation situation of inflation targeting first, and then gives an academic theorization interpretation and also the specific enforcement regulation. This paper analyzes various different features if the inflation targeting system is implemented domestically. The paper summarizes the economic environment which may influence the inflation targeting system into three points:1. The credibility of the central bank is low;2. Underdeveloped financial system marketization3. Suffered many external shocks, and thus result in wide fluctuations of output, exchange rates and interest rates.Through simulating the model of bank loss function, this paper shows the advantage and practical application of inflation targeting monetary policy system in China. Inflation targeting monetary policy system shows the preference of inflation and output of the central bank, and also acts as the key channel of communication between central bank and the public. Monetary Policy Committee will convene regular meeting, announce the meeting details and report the implemented inflation targeting of central bank to achieve the communication in another level. This paper emphasizes that there are three methods to deal with incidents-setting appropriate target inflation mechanism, increasing policy transparency and taking adjusted inflation target. In policy, a series methods could be took, like selecting elastic target inflation range and persisting in advance the process of financial marketization.It can be concluded that, in this paper, inflation targeting is applicable in China for its own advantage and competence to solve economic issues. However, before this, some policy adjustments must be made in domestic, in order to make a better foundation for its actual implementation.