Selection Of Monetary Policy Tools Is Based On DSGE Model

It is difficult for traditional econometric model to convince policy analysis. But the structured model dynamic stochastic general equilibrium model, which is built on the solid basis of microscopic theory, can effectively solve this problem. Policy analysis that is based DSGE model assumes that the structural parameters are constant, but macroeconomic policy parameters are variable in different policy mechanisms. When policy parameters change, even if structural parameters are unchanged, all the elements of the dynamic evolution equation coefficient matrix values are changed, which is deprived by rational expectation equation. However, in the traditional model, the variation of policy parameters does not result in a change in the coefficient of the other reaction. In addition, the DSGE model can introduce various frictions in economies. Therefore, DSGE model can be more effectively for economic policy analysis compared with the traditional econometric methods.Fluctuations in the economy will reduce the level of welfare of the residents. How to maintain stable economic development has always been the pursuit of the goal of macroeconomic policy makers. However, various monetary policy tools to macroeconomic regulation and control effect are different. Currently, main monetary policy tools, which are used in practice and research of various countries monetary policy, are supply of money and interest rate. However, what kind of monetary policy tool is more suitable for China’s economy, the related research literatures have not given a definite conclusion. Therefore, research is of great practical significance to the implementation of China’s monetary policy should be guided by which monetary policy tools.The paper is based on the new Keynesian DSGE model framework. Selecting the most suitable for China’s monetary policy tool through the comparative analysis that the influence of different monetary policy to main economic variables of our country. Mainly through the comparison of the following two aspects:First, what kind of monetary policy tools to economic variables produces more effect? Second, what kind of monetary policy tools reduces inflation and output fluctuations more, and promotes economy steady?Theoretical DSGE model is established on the basis on the research of Ireland (2011). the paper draw the following conclusion through estimating the model I and model II and impulse response analysis:First, two kinds of monetary policy tools are adjusted to output and inflation, but interest rate adjusts more to inflation, and monetary policy tool exists in inertia when adjusting. Second, when interest rate serves as the monetary policy tool of our country, compared to the supply of money, the main economic variable output and inflation in economy is smaller impact by the consumer preference and productivity shocks. In addition, interest rate shock affects more on output and inflation when compared with the supply of money shock. At the same time, interest rate impacts on output and inflation lower persistent effect, that is, economic variable returns to equilibrium state needs shorter time after interest rate shock. Therefore, interest rate has a very significant policy implication for the maintenance of macroeconomic stability. Interest rate is better than the supply of money as the monetary policy tool.The new Keynesian DSGE model that the paper creates has great practical significance, which has a guiding significance to the central bank to implement monetary policy. The conclusion shows that interest rate can be more effective to control inflation and output, for example, in order to reduce the high inflation problem of2010, the central bank will use interest rate rather than the supply of money. Meanwhile, the study has the profound theoretical significance. In the future DSGE model, we will use the interest rate as monetary policy tool, rather than the supply of money which is not suitable for the actual status of our country economy.