An Empirical Analysis Of Operations Of China’s Monetary Policy Based On Extensional Taylor Rule

Monetary and fiscal policies are regarded as two pillars for the government to regulate operation of the macro economy. For their ultimate effects of the policies directly relate to the healthy operation and development of national economy, they play a decisive role on the policy system of one country. Since China established People’ Bank of China as our central bank through legislation in1984, the operation of monetary policy in China has been groping in practice, with significant discretionary colors. In the Ninth Five-Year Plan, the money supply was officially incorporated into the scope of new intermediate targets, our monetary policy began to close to the international monetary policy operation mode. However, after entering twenty-first century, the money supply presents gradual weakening on the effectiveness of indices of measurability, controllability and correlation with the deepening of financial innovation and globalization, and from an international perspective, the focus of the intermediate target of monetary policy is shifting to interest rate or to inflation targeting, so the operation of monetary policy tends to regularization. In this paper, we discussed the operation effects of monetary policy based on limits of discretionary monetary policy and Taylor Rule which regards the interest rate as the intermediate target under the context of extensional Taylor Rule.To illustrate the advantages of Rule, we reviewed and summarized constant debates between Rule and Discretion in the past more than a hundred years from a historical view, and made a general description of histories of the domestic and foreign monetary policy practices, thus both in theory an in practice, Rule has become the mainstream trend; then drew forth the Taylor Rule combining with the dynamic inconsistency theory, developed the classic Taylor Rule with a proper amendment based on previous studies by domestic and foreign scholars, and gave the results of the formulas which are the basis of empirical research model; then analyzed the applicability of Taylor Rule in China and made an empirical test on operations of China’s monetary policy by using the classic Taylor Rule and a series of extensional rules. The results show that the classic Taylor Rule can describe the feedback form of monetary policy of China well; extensional Taylor Rule is superior to the classic Taylor Rule and our central bank would be ape to keep the interest rate smooth and have a forward-looking behavior; in the regression results of extensional rules, it indicates that the monetary policy of macroeconomic regulation which the interest rate is the core of measures for those inflation coefficients are almost small; a hug sum of reserves of foreign exchange have hindered the coordinating role of the exchange rate and the interest rate; Shibor has not temporarily had a basic condition that become the benchmark interest rate of our money market. Finally, according to the results of the above research, this article put forward to corresponding policy proposals from angles of the interest rate liberalization, the reform of RMB exchange rate, the monetary policy adjustment and so on.