Coordination Of Monetary Policy And Exchange Rate Policy In Open Economy

Historically, exchange rate has been the result that the nationals compete and compromise with each others for the optimal policy options. In the process of seeking the rebalance of the global economy, the competitive process which countries attend will be more urgent and intense. RMB exchange rate not only stay out, but will become the focus of competition. In this international environment, in the promoting process of the interest rate marketing, the RMB internationalization and structural transformation of the economic growth, how to coordinate the relationship between monetary policy and exchange rate policy effectively, to exert external influence of the monetary policy as a policy tool to serve our sustained and stable growth, is the primary task of our monetary, authorities.In this paper, we study the question from the nest two parts. Firstly, based on Monacelli (2003) paper model, we establish a three-countries open economy DSGE models. We model the family, firms, central banks and other economic agents in each country. Especially, we add the shadow bank agents in the model. We introduce nominal import price rigidity in the model, so that the effects of changes in exchange rates cannot be transmitted to domestic prices of imported goods completely. We add exchange rate policy in the centre bank policy toolbox, perfect China’s centre bank policy tools under the open economy. Secondly, we estimate the three-countries DSGE model’s parameter and simulate impulse response test. The data in this paper was mainly based on China’s, USA’s, Japan’s macroeconomic data. Model parameters are estimated through Bayesian estimation methods. We simulate exogenous shock pulse response which come from different types of foreign countries to study China’s monetary policy and exchange rate policy coordination problems.The results show that firstly, the international coordination of monetary policy between China and the United States should be strengthened. Secondly, the reinforce of international trade cooperation and international trade steady state has significant effects in maintaining steady and stable foreign exchange rate of China’s CPI index. Thirdly, monetary authorities need to have a global perspective. Monetary policy decision process should be more coordination.