Capital Account Liberalization And The Choice Of Monetary Policy Targeting Rules

With the globalization of the international economy, the deepening of financial integration, capital account liberalization is a common trend in international economic development. However, capital account liberalization will not only promote the economic development, but also affect the choice of a country’s monetary policy targeting rule. The development of the research on monetary policy rules is an important breakthrough in the field of money policy. But domestic scholars focused more on the study of monetary policy instruments rules, while ignoring the importance of monetary policy targeting rules. Therefore, this paper investigates the impact of capital account liberalization on the effects of monetary policy under different monetary policy targeting rules. And it is of great significance for our country to choose the monetary policy targeting rule in an open economy and maintain the balance between domestic and external economies.This paper first reviews the existing research results, then summarizes the history of international capital account liberalization and policy changes. After that, descriptive and quantitative indicators are used to reflect the openness of capital account in China and world. On this basis, this paper analyzes the relationship between openness and the effects of monetary policy using the standard open-economy version of the AD-AS model, the theoretical results show that with the potency of monetary policy on output declines with openness and the inflationary effects of monetary policy increase with openness. In order to verify the results and to further investigate the effects of effects of monetary policy under different monetary policy targeting rules, this paper selects sample of the data from1st quarter of2005to4rd quarter of2012, chooses capital account openness, real GDP, inflation, real effective exchange rate and money shock as endogenous variable, and use Panel VAR model to analyze. The empirical results are consistent with the theoretical results. But the effects of effects of monetary policy under different monetary policy targeting rules are not the same.In the countries which use exchange-rate targeting, the openness of capital account would affect the output and price through exchange rate.In the countries which use monetary targeting, the potency of monetary policy on output would be limited in an open economy, and the inflationary effects of monetary policy increase with capital account openness. In the countries which use inflation targeting, the potency of monetary policy on output is weakened slightly in open economy, and price is closely correlated with the past, thus the openness of capital account has only limited effect on the inflationary effects of monetary policy. Based on the empirical results and theoretical results, combined with experience of other countries and current status, this paper considers that China’s monetary policy targeting rules should change from monetary targeting to inflation targeting, and policy suggestions are given at the end of this paper.