Research Of China’s Monetary Policy Operations Based On Anchored The Money Supply Or Inflation Expectations

1970s, The Western economies suffered with stagflation and many countries implemented monetary targeting which was not ideal.1990s, with the deepening of the financial markets, the development of financial innovation and financial deregulation each level of the money supply became difficult to define. It was more difficult to control the monetary aggregates which resulted in weakening the effect of policy operating strategy of unanchored money supply. As a result, lots of industrialized countries and emerging market countries broke the traditional anchor money supply and began to carry out a new monetary policy operating strategy-inflation targeting. The earliest country who adopted inflation targeting was New Zealand. Theoretically speaking, the inflation targeting include the following five elements:(i) the public announcement of official quantitative targets (or target ranges) for the inflation rate over one or more time horizons, and (ii) the explicit acknowledgment that low, stable inflation is monetary policy’s primary long-run goal. Among other important features of inflation targeting are (iii) vigorous efforts to communicate with the public about the plans and objectives of the monetary authorities, and, in many cases, and (iv) mechanisms that strengthen the central bank’s accountability for attaining those objectives.Firstly, this paper discussed our current monetary policy operating strategy-unanchbred money supply starting from the controllability, testability and relevance of the money supply as an intermediate target. Secondly, combined with the practice of inflation targeting countries it exploredsummed up the theoretical framework of inflation targeting. Thirdly, starting from the implementation of inflation targeting in emerging market countries it discussed the macroeconomic effects of inflation targeting especially before and after the financial crisis, the country’s macroeconomic performance evaluation of inflation targets and non-inflation targeting system. Finally, combined with international experience implementation of inflation targeting it discussed the China’s national conditions and China’s reality and analyzed the policy feasibility.In a word, this paper is divided into five chapters.The contents are as follows: the first chapter described the background, writing ideas and the overall framework of the article, and sort out the relevant literature. The second chapter analyzed the current monetary policy-anchored monetary supply in China. The third chapter discussed the framework which included a theoretical basis and conditions of inflation targeting.The fourth chapter was about inflation targeting implemented in the other countries. This paper selected two emerging market countries Korea and Brazil as typed case and discussed the background of inflation targeting and the effect of the implementation of the inflation targeting them. After that it selected the GDP, CPI, and their fluctuations to describe a country’s macroeconomic performance utilized a DID model comparative analysis of the implementation of inflation targeting countries and no implementation of inflation targeting countries in macroeconomic performance before and after argumentation inflation targeting effectively reduce a country’s GDP growth rate of the inflation rate and its fluctuations, and at the same time there was a positive effect on a country’s higher output. Finally, the time of the financial crisis as a demarcation point, to use DID model to do a comparative analysis of the macroeconomic performance and the response to the financial crisis of inflation targeting in the emerging market countries. The fifth chapter China’s inflation targeting feasibility analysis, combined with the implementation of the inflation targeting conditions and the reality of our situation to make specific policy recommendations.The main conclusions of this paper:(1)In our current monetary policy strategy, unanchored money supply policy effect is not so significant. Money supply as the validity of the intermediate target is declining, which directly restricts the realization ofthe ultimate goal.(2)Asuccessful inflation targeting depends on certain preconditions. These conditions can be summarized in three areas:institutional aspects, operational aspects and economic aspects. System design, the central bank should have an explicit inflation target, a certain degree of independence and accountability and transparency to achieve this goal.In operation, the central bank must establish a prediction model that includes a variety of macroeconomic variables, the model requires that accurately reflect the past and predict the future. Finally there must be a stability macroeconomic and financial environment.(3) From the point of view of international practical experience of inflation targeting, inflation targeting, not only in the individual countries achieved success, to bring the inflation rate remains at a low and stable level but also for the overall implementation of inflation targeting in emerging countries to their macroeconomic performance is also impressive.On one hand, those inflation targeting countries reduce the rate of inflation and its volatility and on the other hand it can bring an increase in output. The inflation targeting can improve a country’s macroeconomic performance. In this paper, it draws a conclusion that inflation targeting has an outstanding performance during the financial crisis.(4) From the view of the feasibility of the implementation of the inflation targeting regime in our country, there are deficiencies in China’s central bank independence and the establishment of the inflation target prediction mechanism, as well as the level of development of the financial market. It could not immediately establish highly transparent policy framework, but can gradually improve the following:first, make sure the price stability on the monetary policy operating strategy first. Second, in operation technically, adopt the experience of emerging market countries such as Brazil, the Czech Republic. It should use a small macroeconomic model to forecast the results of the inflation target and gradually establish the model which is more suitable for China’s national conditions. Third, in the construction of economic and financial environment it can through the construction of multi-level capital market, the formation of flexible floating exchange rate, to further promote the interest rate market and constantly improve the financial markets in order to ensure the smooth implementation of the monetary policy transmission mechanism.The methods in this paper:This article takes a combination of qualitative and quantitative analysis method. Qualitative analysis includes the main case analysis and comparative analysis. Use case analysis method to analyze a typical case of the implementation of inflation targeting countries in order to draw a few commons of inflation targeting in emerging market countries.Use the comparative analysis to summarize the implementation of inflation targeting connotation, theoretical framework and conditions for implementation. The mainly quantitativeanalysis methodis VAR model which test the effect of China’s current monetary policy and DID model. It utilized the double differential estimation model (DID) on the implementation of inflation targeting on macroeconomic performance and price levels to test the policy effects of this system.Main innovation of this paper:Different from only a few of the implementation of inflation targeting countries with most of the research at home and abroad analysis, the paper examines the29inflation targeting countries including20emerging market countries and nine industrialized countries. It emphasis on the implementation of inflation targeting in emerging market countries and the corresponding non-inflation targeting countries according to per capita GDP and national circumstances similar principle to select as a control, comparative analysis of the macroeconomic performance of emerging market countries. Especially want to emphasize is that these countries before and after the financial crisis, macroeconomic realizable do the same comparative analysis, conclude that inflation targeting the same outstanding performance during the financial crisis.Deficiency of this paper:Inflation targeting is an emerging field of research on China. The recommendations of the inflation target are just a preliminary study based on historical data and international experience. There are many aspects which also need more in-depth research and improvement, such as how to establish an inflation targeting forecasting model, the specific implementation steps of inflation targeting in China, and how to choose and with the tools of monetary policy variable need to do a deeper and more comprehensive study in the future.