Monetary Policy Rules In Open Economy And Stability Of The Macroeconomic

In recent years, the domestic macroeconomic becomes unstable with theincreasingly complexity of international financial environment and inappropriateoperation of monetary policy. However, the central bank mostly used ‘Against theEconomic Wind’ strategy to monetary policy, faced with the currentmacroeconomic problems such as excess liquidity, high inflation and appreciation ofthe RMB. Obviously, this affects the smooth running of the domestic macroeconomic.It is an important task of the monetary authorities to seek an optimal monetary policyrules in the open economy, choose an optimal operating path to make themacroeconomic running smoothly.Domestic scholars have made some relevant theory and empirical research onmonetary policy rules. However, their research methods mostly are traditionaleconometric methods such as regression analysis, Granger causality test, andCo-integration test. Liu Bin (2008), Xi JunYang&Heyun Song (2010) and Sui Jianli(2010) Etc.domestic scholars make relevant researchs using DSGE models. Liu Bin(2008), Jin Chengxiao&Ma Lijuan(2012), Zhang Jieping (2012), Ye Yafen (2011)and other scholars established a New Keynesian DSGE model under the openeconomy.In this paper, we establish and estimate a New Keynesian DSGE model includingprice stickiness according to Chinese macroeconomic data since1994.Furthermore,we match it with two different monetary policy rules: Forward-looking Taylor rule,Expected inflation targeting rule. We can get the following conclusions throughanalyzing and comparing the results of DSGE models in two different monetarypolicy rules. Firstly, the interest rate can play an ‘Inner Stabilizer’ role in Forward-lookingTaylor rule facing the impact of RMB appreciation. It weakens the disturbance to themacroeconomic caused by exchange rate shock by reducing the nominal interestrate.Meanwhile, it leads the output and inflation rate rising to a normal level. Theshort-term disturbance caused by exchange rate shock has the nature of expansion.However, the forward-looking Taylor rule can lead the macro economy going out ofthe disturbance to the steady state as soon as possible.Secondly, the level of output and CPI will decrease in the impact of a positiveinterest rate shock. This indicates that a tightening monetary policy can ease theoverheating macroeconomic.Thirdly, the Forward-looking Taylor rule can reduce economic fluctuationscaused by the four kinds of shocks (except the output of world shock) more faster andmore effectively.We can get the following conclusions through contrasting China’s economicmacro simulation in the two different monetary policy rules. The Forward-lookingTaylor rule can reduce the fluctuations of the main macroeconomic variables in theeconomy, suppress the economic fluctuation effectively, shorten the duration ofeconomic fluctuation.In summary, the Forward-looking Taylor rule can suppress the economicfluctuation more effectively. The monetary authority should adopt theForward-looking Taylor rule as the operation rule paradigm of China’s monetarypolicy, maintaining economic healthy, stable and sustainable.