Nonlinear Modeling And Application Of The Taylor Rule Based On The STR Model

Monetary policy, is the sum of policy and measures which are the central bank made for realizing the economic targets by all kinds of tools which can adjust the money supply and interest rates, then influence macroeconomic. Usually come to see, the market economic countries exist two monetary policy types:camera choice type and rules type. A monetary policy rules describe how the central bank setting corresponding monetary tools or set interest rates function according to the GDP expansion or through economic variables, in order to realize monetary policy’s ultimate goal, keep a low and stable inflation, and the smaller GDP volatility. According to the different function levels of monetary policy, the monetary policy rules can be divided into target rules and tools rules. Target rules refer to the monetary policy to determine the intermediate objectives; tools rules refer to the Central Bank’s monetary policy tools’operation norms.The Taylor rule is a simple monetary policy tools rule, it summarized the monetary policy’s two objectives, make the economy to achieve maximized and sustainable growth, and at the same time maintain low and stable inflation. That is so-called the linear Taylor rule and the interest rate rules.But the linear Taylor rule often leads to macro-control effect lags behind, the elastic smaller, in solving process of monetary policy by operating tools. Therefore, all national experts and scholars working on study and explore the Taylor rule that can in line with their actual situation, so as to guide the country’s macroeconomic regulation and control effect and inertia problem of interest rates mechanism. Levin, Wieland&William (1998) found that the reaction coefficient of the lag interest rates is very big, show that the fed funds rate mechanism is provided with significant inertia. Mishkin,1999expanded the Taylor rule, adding interest rates smooth factors into the Taylor rule. Clarida, Gali and Gertler (1998,2000) established the prospective monetary policy response function, the estimation results showed that the interest rate policy of the Paul Volcker FED Alan Greenspan period responded to the expected inflation more sensitive than the interest rate policy before.The most of above studies are aimed to correction and expand the linear Taylor rule, but the studies of the nonlinear Taylor rule are little. China’s monetary policy implemented in a relatively short time, only10years or so, therefore, these are many problem has not effectively solved in the process of finance macro-control operation just as controlling effect is bad, the interest rates low elastic, so it became a hot topic that experts and scholars studied and discussed. And China entered the market economy for many years, financial macroeconomic regulation and control means have been widely applied, so the macro economic variables interweaved together, formed a complex system. The problems in The Taylor rule such as reactions function and inertial mechanism of interest rate cannot be resolved by linear method, should be given to nonlinear means and methods, which is an effective tool for dealing with complex system, so as to achieve the purpose of showing the China’s Taylor rule has flexibility application. Due to the limitation of research methods, the research papers of Taylor rule’s nonlinear problems are very rare.This paper analyzes the nonlinear Taylor rule’s source, usage and origin, defines the theoretical context of the nonlinear Taylor rules, and according to compare with other the Taylor rule nonlinear STR methods, chosen a smooth transition mechanism (STR) model, through optimization and improve it, finally established the Taylor rule nonlinear STR model. This paper uses several macro economic variables testing the model established in this paper; the study also shows the model is reasonable. The variables embrace GDP, interbank lending rates, CPI and the Shanghai composite index (reference variables), the data is range from1996to2011, nearly64quarters. This paper compares the model established in this paper with the linear Taylor rule model, through the two models’predictive value and actual value comparison, proved that the more effectiveness of the model established in this paper, and finally gives some policy recommendations.The paper divides into seven chapters:chapter1introduction; Chapter2related spare knowledge of the Taylor rules and STR model; Chapter3the nonlinear Taylor rule’s source, usage and origin; chapter4The choice of the nonlinear time series econometric models; Chapter5the Taylor rule’s nonlinear STR model’s establish; Chapter6the Taylor rule’s nonlinear STR model’s application; Chapter7conclusion.