Research On The Effectiveness Of Monetary Policy To Inflation Of China

In the second half of2010, the economic recovery trend become furtherconsolidate,the rapidly rising prices gradually become the most striking contradiction ofChina’s economic operation. In the2011,Consumer price index rose more quickly.Consumer price index (CPI) rose to5.4%,5.3%,5.5%in March2011, April, May,morethan the warning level of5%for three consecutive months. The consumer price indexeven rose to6.4%in June2011. Price stability is one goal for the monetary policyauthorities committed to achieve. In the face of sustained large price pressures, thePeople’s Bank of China turns monetary policy from easy to sound. This paper takes thisinflation and Monetary policy as the object, study the causes and characteristics ofChina’s current inflation, monetary policy implementation and the effectiveness ofChina’s current monetary policy in controlling inflation.The main part of this paper is to study the effection of Chinese monetary policyimpact on controlling inflation through the qualitative and quantitative research. First ofall, we analyze the effection of monetary policy of China from a qualitative point.Because each causes and characteristics of inflation is different, we can not curb inflationsimply by tightening the monetary policy. Therefore, in the face of the current inflation,this paper,first,analyze the root causes and characteristics of inflation. The main featuresof the current inflation: the overall level of consumer prices rising, food prices is themain driving force of CPI rise, inflation expection deepen the upward pressure on prices.Considering the causes and characteristics of the current inflation, the People’s Bank ofChina has adopted a series of measures, including increasing the intensity of open marketoperations, raising the deposit reserve ratio, raising the RMB deposit and lending ratesand rising exchange rate. These monetary policy measures relieve the pressure of excessliquidity in a certain extent and the tightening monetary policy has achieved a certaineffect. But many unfavorable factors add uncertainty to demurrage of monetary policy,reduce the effect of monetary policy implementation.Given the complexity of inflation, only the qualitative analysis is not enough, acertain amount of quantitative analysis is in need. In this paper, we use of econometricmethods for quantitative analysis of the effectiveness of monetary policy on controllinginflation. Monetary policy variables include the year-on-year growth of money supply M2, the scale of loans from financial institutions and the deposit reserve rate (RR). Theconsumer price index (CPI) measures of the level of inflation. This paper uses Grangercausality test, cointegration test and error correction model to analyze the impact ofChinese monetary policy variables on the level of inflation. Granger causality test founda mutual relationship between monetary policy variables and the inflation; Cointegrationtest shows the existence of long-term equilibrium relationship between monetary policyvariables and the consumer price index; The error correction model discovers the speedof adjustment of these variables deviate from their common stochastic trend.Finally, this paper provide some policy recommendations basing on qualitative andquantitative research above.In the short term, we should enhance the effectiveness ofmonetary policy tools and pathways. And move"dual targeting" to inflation targeting inthe long term.