The Tool Rules Based On Welfare Loss Function And Their Test In China

The paper determines the output gap based on aggregate demand equation, the inflation rate based on expectations-augmented Phillips curve and the optimal tool monetary policy rule centered on interest rate based on quadratic loss function with interest smoothing adding simple expectation,that is, improved Taylor Rule;then determines the output gap based on standard money demand equation, the inflation rate based on expectations-augmented Phillips curve and the optimal tool monetary policy rule centered on money supply based on quadratic loss function with money supply smoothing adding simple expectation, that is,improved McCallum Rule.And it also justifies that the behavior and prefer of People’s central Bank of China varies over time and the stages of economic operation,that means the monetary policy of China characterized by time variability and asymmetry.Then it develops Time-Varying-Parameter Taylor Rule and Time-Varying-Parameter McCallum Rule,and test it empirically based on China data to ascertain the time variability and asymmetry,comparing the two rules, determining the scope of their application to make it clear whether it is applicable in China and its future usage.The result shows that our monetary policy which based on quantity of money used to keep economic growth effectively,but after year of 2008,especially 2012,its effect has significantly descended.However the market interest rate has gradually found its position,the opportunity has been on the horizon,our central bank should find the right time to take Taylor Rule as its new monetary policy rule.