The Recent Development Of Monetary Policy Theory In Western Countries

Monetary policy refers to the set of method and means of the central bankto control the money supply or credit amount to achieve its specific economicgoals. And the theory of monetary policy is about the ultimate goal of monetarypolicy, the intermediary target, the policy tools, the transmission mechanismand the effectiveness of monetary policy. From the early twentieth century tothe present, monetary policy theory has developed and formed a more maturetheoretical system. Theory of monetary policy has always been a focus in thestudy of macroeconomics. It is related to the central bank’s monetary policyoperation, and has very important practical significance. This paper reviewsthe recent development in all aspects of the theory of monetary policy.As a part of macroeconomic theory, the monetary policy theory has aclose relation with the macroeconomic theory. In the introduction of this paper,we introduce the development of macroeconomic theory associated withmonetary policy and describe the main content of the Keynesianism, theMonetarism, the New Classical Macroeconomics, the New Keynesian and theNew Neoclassical Synthesis theories to lay the foundation for the followingdiscussion.In the first chapter, we describe the development of the ultimate goal ofmonetary policy since the early20th century. Generally speaking, the monetary policy target includes full employment, economic growth, pricestability, stable interest rates, stability of financial market and foreign exchangemarket. The second part of this chapter discusses the concept of monetarypolicy intermediary target and the debates about how to choose theintermediate target. Then we introduce two framework of monetarypolicy-----inflation targeting and the neutral money policy based on the Taylor’srule.We discuss monetary policy tools in the second chapter. Monetary policyinstruments can be divided into traditional monetary policy tools andunconventional monetary policy tools which appeared in the financial crisis.The traditional monetary policy tools include three aspects which are thediscount, the deposit reserve and the open market operation. And we discussthe component, the effect and the development of these tools. In the next part,we first introduce the definition of the unconventional monetary policy and thevarious types of unconventional monetary policy tools. Then we describe themain function of these tools and finally discuss whether these tools areeffective.The third chapter mainly studies the transmission mechanism of monetarypolicy. According to different transmission channels, we divide the monetarypolicy transmission mechanism into four types including the interest ratechannel, the exchange rate channel, the asset price channel and the creditchannel. We respectively introduce the main content of the four transmission mechanism. Interest rate channel and exchange rate channel respectivelyemphasize the important role of interest rate and exchange in the process ofmonetary policy transmission. Asset prices channel emphasizes that thechange of asset prices can have an influence on the economic subjectbehavior. The essential part of the asset price channel is Tobin q theory andthe Wealth Effect. Tobin q theory describes the impact of asset price changeon the behavior of firms. The Wealth Effect describes the mechanism of theasset price on household behavior. And the credit channel is divided into broadcredit channel and the narrow credit channel. The narrow credit channelconsiders the banks’ balance sheets as the core of its analysis. While broadcredit channel puts corporate balance sheets in the core position.The fourth chapter is about the effectiveness of monetary policy. On theone hand, we discuss the theory of monetary policy effectiveness from theperspective of macroeconomic theory. In this part, we introduce the MonetaryEconomic Cycle model, the Real Business Cycle model and the NewKeynesian model. Then we discuss under the assumptions of these threemodels whether the monetary policy can affect the real variables in theeconomy. On the other hand, from the empirical point of view, we introducesome latest research results about the monetary policy effectiveness. However,these results are not consistent. Some economists argue that monetary policycan have practical impact on the economy. While other economists’ studyshows that the impact of monetary policy on economy is not significant. The fifth chapter summarizes the main content of this paper. And theauthor gives some personal views of the possible development of monetarypolicy theory in the future.