Research On The Applicability Of The Forward-looking Taylor Rule On The Monetary Policy Of China

Since the 1990s, the theory of monetary policy rules has matured, which has made great achievements in the application of practice in the Western countries. And the transformation of monetary policy into rules is favored by more and more central Banks. Our country’s past practice of monetary policy has a significant feature of discretion. The advantage of discretionary monetary policy can better respond to the real economic problems, according to the recent economic situations. However, under the influence of block of monetary policy transmission block, price stickiness, wage rigidity and other factors, discretionary monetary policy often leads to greater economic volatility, therefore, monetary policy rule is bound to become the future direction of monetary policy. Taylor rule is the monetary policy rule which is summed up by Taylor according to the decades of historical experience of US monetary policy. Based on the original Taylor rule, Forward-looking Taylor rule uniquely introduced expected factors, which enhanced its theoretical effectiveness and practical significance. Forward-looking Taylor rule provides the operations of China’s monetary policy with strong reference. Therefore, learning theoretical results and practical experience of Forward-looking Taylor rule can really contribute to improving the framework of China’s monetary policy, enhancing the timeliness and scientificity of monetary policy, and ensuring the stable operation and healthy development of China’s macro economy. Based on the theory of the forward-looking Taylor rule, by reviewing and summarizing the history of China’s monetary this paper analyzed the necessity and feasibility of the forward-looking Taylor rule. And then by doing GMM regression analysis, this paper conducted an empirical study on the forward-looking Taylor rule and its extensions,which tested the rules’ applicability on China. And by building VAR models, demonstrated the applicability of Shibor in the background of New Normal as a future choice of representative indicator of interest rate for the forward-looking Taylor rule.