Study On The Applicability Of Monetary Policy Rules With The DSGE Model

In recently years, the monetary policy rules has been one of hot topics in thestudy of macroeconomics. Many scholars have studied about the subject in detail.Early equations of the monetary policy rules derived from the statistical properties ofthe data, analyzing the policy rules by constructing the rules equation to fit the datastructure and welfare loss functions. However, studying on the monetary rules by thenature of the data only is slightly insufficient, with the development of themacroeconomic modeling and of the interestrateliberalization process in China. Atthe same time, more and more scholars,in fact, are suspicious of conducting themonetary policy through the money supply. Therefore, this article use the dynamicstochastic general equilibrium model which is widely used in recent years to analyzethe applicability of the monetary policy rules in our country on the basis ofsummarizing the previous research works. We will conduct the Bayesian method toestimate the model paremeters, as well as compare the impact response functionsunder different model structure which is due largely to the difference of monetarypolicy rules to draw the conclusion of this paper.To build the dynamic stochastic general equilibrium model of open economy,we refer to the research methods and the model framework of Gali and Monacelli(2005), Gali (2009), Liu and Zhang (2010). And we use the method of calibration toassign the parameters of the model as prior distribution referring to the study ofrelated issues from domestic scholars. In order to avoid the stochastic singularityproblems in the process of estimation and simulation, we select the data of GDP, the consumer price index and the interbank offered rates begin with the first quarter of1996and ended in the third quarter of2013. We use the method of Bayesian toestimate the parameters of the models after implementing stationarity test and logprocessing to the data. Results show that the model constructed in this paper isstructural models which could the Lucas critique, illustrating the feasibility ofcomparison between different monetary policy rules as well.In order to compare the different impact response functions of the inflation andoutput, we exert the impact which from the monetary policy, inflation and theexchange rate on the economic system. By analyzing the fluctuations and volatilityduration of the inflation and output under different monetary policy framework, wecould get following results that interest rates is a powerful monetary policy tool,which could fully play the role of intrinsic stabilizer in the in the economy system.Under the framework of interest rate rules, economic variables are able to respondfully to policy. At the same time, interest rates could weaken the fluctuation ofeconomic variables when facing the exogenous shocks such as impact of inflationand real exchange rate, and reduce the duration of volatility, guiding the economicreturn to steady state in a short period of time. However, when facing the impact ofinflation, the economic variables such as inflation and output under the interest raterules framework might be lead to greater change. Comparing with the quantity ruleand the "hybrid rule" which conduct by Liu and Zhang(2010), We could come to theconclusion that central bank should refer interest rate rule to regulate themacroeconomic as to ensure the stable and rapid economic development. Supply ruleand "hybrid rule" have poor performance under model framework in this paper.