The Analysis Of Optimal Monetary Policy In China Based On New Keynesian Framework

Since the 1990s, Macroeconomics, especially Monetary Economics, has gotten a huge breakthrough in the field of the analysis of theoretical research and policy practice. In theory, RBC absorbs the assumption of price rigidity and imperfect competition and so on which are the characteristics of traditional New Keynesian economics and develops a wholly new monetary economics cycle model. After that, the frameworks based on DSGE have become the widespread paradigm in monetary policy analysis, which take the main macroeconomic variables such as inflation, output and nominal interest rate and so on into one framework. The NK model among them, gradually becomes the benchmarking framework of the monetary policy analysis due to absorbing the hypotheses of rational expectation and nominal price stickiness, etc. In practice, more and more countries begin to adopt inflation targeting and monetary policy operation pattern gradually changes from discretion to prior commitment. Establishing the reputation mechanism of the central banks and so on, which belongs to the non-traditional operation, has become the focus in policy-making.This paper empirically analyses the optimal selection in China’s monetary policy using NK model based on the study of primary literature at home and abroad. On the one hand, under different monetary policy operation patterns, this paper studies the central bank’s preference and interest rate smoothing effect by using the standard NK model to make the best choice for monetary policy. On the other hand, the optimal monetary policy defined by the traditional framework of monetary policy is built based on the quadratic loss function of the central bank. Some existing researches have recently showed that the important standard of optimal policy is whether it could make the economy converge to the rational expectation equilibrium. From the perspective, this paper further explores how the different strategic interactions between the central bank and the public lead economy to deviate from the REE. First, it depicts the forming process of macro expectations through introducing adaptive learning in the framework of the New Keynesian model. Second, we calculate the deviation degree of economy to the REE and the level of mean and volatility of economy by using the method of dynamic numerical simulation under different strategic interactions. Last, we analyze the results above all and distinguish the optimal monetary policy. This paper shows flexible inflation target or mixed nominal income target could be used by the central bank to make the economy steady and develop in harmony.The research shows the discretionary rule can effectively iron fluctuation of output and prior commitment rule is more efficient in curbing inflation volatility. When fecing symmetric impact, the forward-boking interest rate rule with smoothing can effectively restrain economic fluctuations. But the degree of smoothing shouldn’t be too big. In addition, the asymmetric effect also has a big impact on monetary, and it again proves the basic conclusion above all. Under incomplete rationality, using flexible targeting regime and mixed nominal income target is most useful in decreasing the deviation from the equilibrium level of output gap and inflation.From this paper, the central bank should design a suitable monetary policy according to its actual requirement from more perspectives. In the case when public expectations were not very rational, flexible inflation targeting and mixed nominal income target are both the optimal forms of monetary policy in China, and these regimes can effectively make economy steady and develop coordinately.