Research Of China’s Monetary Policy Choice Problem Under Dilemma

Since the reform and opening up for more than30years, the Chinese governmentnurturing export-oriented features of China’s economic through policies which perennialencouraging exports. The direct impact to macroeconomic is the continued trade surplus.The sustained rapid economic growth attracts foreign direct investment and internationalhot money inflows. China’s international balance of current account and capital andfinancial account showed "double surplus" phenomenon. It accumulated massive foreignexchange reserves.However, the long-term double surplus of the international payments with the hugeforeign exchange reserves make the central bank had passive put a large number of basemoney. This increase domestic liquidity and increase the difficulty of hedge operation ofthe central bank’s monetary policy. While the central bank passive put in money, in order tomaintain a stable exchange rate and prevent domestic economic overheating and inflation,the central bank have to hedge excess monetary base in the open market operations. Thecentral bank put in monetary passive cause excess liquidity, so it has to implement tightmonetary policy to prevent the economy overheating. It is making the central bank’smonetary policy operation space getting smaller and smaller in the multiple objectives ofprice stability and economic growth, and even the stability of the exchange rate withpassive operation coupled with the limited nature of the monetary policy tools. China’seconomy has not been able to get out of the cycle of putting with loose and grasping withdeath, it has fall into a difficult dilemma. It also confirmed the Paul R. Krugman’s "ternaryparadox", that is independent monetary policy, exchange rate stability and free capital flowsthis three can only choose two, exchange rate stability and independent monetary policycannot be both in open conditions.The macro-control should be how to do this in order to avoid falling into thepalliatives dilemma facing of the complicated economic situation? The monetary policyshould how to strike a balance between economic growth and price stability in the currenteconomic environment? How to crack the vicious circle of China’s national economy whichhas long been putting with loose and grasping with death? Operating framework ofmonetary policy should how to adjust to adapt the changing economic and financial health?What influence will China’s economic structure and financial structure with dualcharacteristics make when implement and conduct monetary policy?It is the current plight of the monetary policy dilemma, this paper combined withChina’s national conditions, reviewing the practice of monetary policy over the past10years and learning from foreign experience of the operation of monetary policy. In thispaper, we study the influence factors of China’s monetary policy and the path choice, in-depth analysis the difficulties faced by China’s monetary policy and the effects ofmonetary policy. Through theoretical analysis and empirical analysis of the effectiveness ofmonetary policy in China, pointed put forward policy recommendations to promote China’smonetary policy effectiveness finally.