A Study On The Asymmetry And Time-variation Of Our Country’s Monetary Policy Rule

Our country’s monetary policy is with strong feature of discretion, especiallybefore twenty-first century, government adopting the macro regulations frequently, alsothe economic system had a sharp fluctuation. But in recent years, many studies haveshown that monetary policy instrument rules are of application. Especially the Taylorrule, it has been studied widely, but most of the research are confined to the traditionallinearity. This may be not in line with macro-economic situation, and many experts alsoshow that the monetary policy rule is asymmetric and time-varying. Breaking throughthe limitation of traditional linear Taylor rule, this paper has a comprehensive study onthe asymmetry and time variation of the monetary policy rule. According to the researchabout the asymmetry of monetary policy rule, we can explore whether there existsasymmetric preferences of the output gap or inflation gap in the monetary policy rule.Through the study of the time variation of the monetary policy rule, we can work outwhether the monetary authorities have different regulatory efforts in different economicsbackgrounds. A comprehensive study on the asymmetry and time variation of themonetary policy rule can make up for the shortage due to the linear model of monetarypolicy rule, giving the monetary policy rule research theory more meaningful andpractical significance.The theoretical basis of Taylor rule is to minimize the central bank welfare lossfunction based on the linear aggregate supply curve and the aggregate demand curve,and the welfare loss function is a linear combination of the inflation gap square termand output gap square term. But now there is a view that the central bank welfare lossfunction gives the positive deviation or negative deviation of output and inflationagainst the target values a different weight. That is to say central banks not only payattention to the size of the deviation, but also pay attention to the direction, whichextends the asymmetric preference problem of the monetary policy rule. On the otherhand, some research divide the sample, then study the reaction function in stages, itmeans that the structural change can be found in the monetary policy reaction function,which extends the time-varying parameter characteristics of the monetary policy rule.This paper firstly studies the interest rate smoothing Taylor rule, the empiricalresults show that the model can simply describe China’s macro-economic situation. Butwhen I regard the2002Q1as a break point and make chow break point test on monetarypolicy reaction function, it shows that monetary policy rules experienced a structural change. So I also study the monetary policy rules feature before and after the year2002,as well as considering the asymmetry. The empirical results show that there existsa negative output gap preference after2002,the monetary authorities response morestrongly to the negative output gap, this point is in line with the background that thepeople’s Bank of China adjusted the deposit and loan interest rate. The chow breakpoint test simply study the structural change of the monetary policy reaction function, inorder to study the time-varying feature of the monetary policy rule morecomprehensively, this paper build a state space model. The results show that theparameters have a greater fluctuation in the end of twentieth century, however thetrend of the parameters are relatively stable at the beginning of this century.The innovation of this paper are as follows:(1)At present, most of the researchhave modified the Taylor rule simply, for example, considering the interest ratesmoothing, introducing the factors in capital market and foreign exchange market.There are some researches about asymmetry and time variation about the monetarypolicy rule, but less. breaking through the limitation of traditional linear Taylor rule, thispaper has a comprehensive study on the asymmetry and time variation of themonetary policy rule.(2)Now there are some research that put the real effectiveexchange rate of RMB and asset price into the model, trying to study the influence ofthe capital market and foreign exchange market on the short-term nominal interest rate,but few studies have considered the impact of international interest rates on short-termnominal interest rates in China. In this paper,as a proxy for the international interestrate, the America federal funds rate is added to the model, trying to study whethershort-term nominal interest rate is affected by the international interest rate. This paperalso has its deficiency:(1)This paper mainly study the situation that central bank adjustthe interest rate according to the output gap and the inflation gap,meanwhile thelong-run equilibrium real interest rate and the inflation target are not been studied indepth.(2)The time-varying feature of the monetary policy rule mainly reflect in theparameter, however the time variation in monetary policy rule may not only confined tothe parameter. Maybe the monetary authorities take different types of monetary policyrules in different periods, it is to say, in a district system, they take the growth rate of thebase money as operation target and behave according to McCallum rules, but in theother district system, they take the interest rate as operation target and behave accordingto Taylor rule.