The Control Variable Selection Of Monetary Policy Effectiveness

With the range of financial assets and the complexity of financial institutions in the modern economy, the question of how to ensure the effectiveness of monetary policy by choosing of the right economic variables as control variables in order to ultimately achieve the policy objectives, must be addressed by policy-maker, to solved this one should consider the money creation mechanism and re-examine the stability of monetary control variables. The lasting debate of traditional monetary analysis, that refers to which should be the control variable, interest rates or monetary targets. Generally economists reached the consensus that the choice of monetary control variable is one kind of conditional analysis, then it should therefore be to distinguished between the environments for implementation of the different monetary regimes. This paper will attempt to answer this question, and seek new ideas for interpretation what the effectiveness of monetary policy is.Based on the theory of money supply, we construct an extended credit counterparts framework with comprehensive of money multiplier approach, which supplies with best analysis of determination of money supply. And by building a macroeconomic general equilibrium model which consists of four departments and four asset markets, in order to interpret the selection of monetary policy control variables. This analysis concluded that, in a very different monetary system, monetary policy does need to be conditional on the monetary environments:if the assets are perfect substitute in a fully competitive market, interest rates as control variables show the uncertainty of the economic characterization of the effectiveness of monetary policy, but if the assets do not completely substitute in the financial markets, interest rates as the control variable will have a positive economic effect impact on the economy. And on both of the two conditions, the monetary targets show neutrality. The results provides a new way to re-interpretation of the effectiveness of monetary policy proposition.