The Empirical Study And Comparison Of A Forward-looking Interest Rate Rules Based On Different Inflation Expectations In China

China officially announced the supply of money as the intermediate target of monetary policy in 1996. Since then this model has been used. However, a large number of scholars believe that the money supply has not become an effective means to control monetary policy. This is mainly due to the declining rate of monetary liquidity, the money multiplier has been unstable. At the same time, the development of economic globalization and the deepening of financial innovation broke the inherent stability between money supply and economic activity, which led to the money supply as intermediate target of monetary policy weakening in controllable, measurable and the correlation of final goal.Many western countries ran into this problem as early as the 1990s, their main solution is to take interest rates as the intermediate target of monetary policy instead of the money supply. Taylor studied the relationship in three variables, which are short-term nominal interest rates, inflation and the output gap. And through testing the US quarterly data, he confirmed that the Taylor rule for the development of the Fed’s monetary policy has played a reference and guidance role. Then, to solve the problem of time lag of monetary policy, scholars propose a forward-looking interest rate rule, which holds that inflation in the same period or in the past year is not the emphasis, only inflation with expectations discretion is the key to consider policy orientation. The essence of it is to introduce expected inflation on the basis of the Taylor rule.Therefore, this paper hopes to draw lessons from the successful monetary policy rules of the Western countries, analyzes the applicability of a prospective interest rate rules in our country based on the introduction of inflation expectations that suits for China. Through empirical research and comparative analysis, we obtain some important judgments and conclusions, which provides a new direction for the improvement of China’s monetary policy, and contribute a theoretical basis to the intermediate target of Chinese monetary policy shifting from the money supply to short-term nominal interest rates.Firstly, this paper gives a brief review and summary on the domestic and foreign research results of interest rate rules, and interest rate rules theory and the theory of inflation expectations are introduced respectively on the basis of this. Interest rate rules theory describes the classic form of the Taylor rule and its extended form:smoothing interest rate rules, forward-looking interest rate rules. This paper outlines the proposal and the development of each rule and summarizes the practice of each rule. While inflation expectation theory presents the formation and characteristics of inflation expectations, and describes four types of inflation expectations including adaptive expectations, rational expectations, mixed expectations and Kalman expectations, which lays the theoretical foundation for the next part of the empirical analysis.Secondly, the empirical research part, is the focus of this paper. First, the selection of the indicators involved in the forward-looking interest rate rule are described, and we elaborate on the conventional methods, the advantages and disadvantages of the domestic and foreign research in the course of the selection of the interest rate index, expected inflation rate and the output gap index. The output gap index is required by the linear trend estimation method. Then according to forward-looking interest rate rule, we deduce a forward-looking interest rate rule which will conduct empirical estimation based on different inflation expectations, choose the appropriate instrumental variables, adopt the GMM method, and fit the short-term nominal interest rate and the interest rate proposed rule value in China. By comparing fitting result of forward-looking and the traditional Taylor rule under several inflation expectations, we consider that forward-looking interest rates rule can better fit the trend of Chinese interest rates compared to the traditional Taylor rule. Meanwhile, China’s inflation is expected to exist the rational inflation expectations and Kalman inflation expectations, but the adaptive expectations is not obvious. Forward-looking interest rate rule based on rational expectations and Kalman expectations is consistent with short-term nominal interest rates relatively.Besides, on the basis of the previous analysis and summary, we constructs the forward-looking interest rate rule model in this paper having higher fitting degree in 2000-2014 interbank offered rates, which indicates that interest rate adjustment has a certain regularity based on the change of rational inflation expectations, Kalman inflation expectations and the output gap. This regularity can be a good description of the trend of interbank offered rates, which can be used as the reference tool for the central bank to implement monetary policy. At the same time, forward-looking interest rate rule under rational inflation expectations and Kalman inflation expectations can guide the central bank to adjust interest rates, and provide a reference direction for China’s monetary policy operations to a certain extent.In the end of this paper, we point out the limitations of the forward-looking interest rate rules that exist in the empirical estimation. In order to make interest rate rules to provide guidance for monetary policy operations better, to enhance the applicability in China, this paper presents some policy recommendations. We will continue to improve the benchmark interest rate system, build an effective interest rate transmission mechanism, improve the government credibility, strengthen monetary policy transparency and maintain the stable operation of macroeconomic.