Coordination Of Monetary Policy And Exchange Rate Policy Of China

When the country chose its suitable policy, Exchange rate is an important factor to consider. the government will use the exchange rate as a policy tool to achieve its purposes. It’s the most important task to Coordination use the monetary policy and the exchange rate policy to maintain our economy growth steadily.This paper builds a DSGE model for a small open economy, and the model includes Households, firms, Foreign trade, Government, Central Bank and the balance of payments. Get the optimal conditions for each sector through Lagrange multiplier. And we also defined a Taylor-type rule which intervenes the money market, and a rule that determines the rate of nominal depreciation which intervenes the foreign exchange market, here the nominal depreciation is just the changes of the exchange rate, such as the ratio between the exchange rate in t and the exchange rate in t-1. With the Managed Exchange Rate regime, the central bank both use the Taylor-type rule and the nominal depreciation rule to intervene money market and exchange rate market. We defined the loss function in the Optimal policy under commitment, And defines the central bank’s three different preferences, Such as preferences with inflation targets, preferences with GDP, and preferences with both inflation targets and GDP. We use the impulse response analysis and intuitive reflect several impacts to our main macroeconomic variables like inflation, output, and real exchange rate, and we can see that implements the management of exchange rate system in our country which the policy intervention in currency markets and foreign exchange market at the same time is good for regulating the economy of our country, Monetary policy and exchange rate policy coordination use is inevitable.