Conflict And Coordination Of China Monetary Policy And Exchange Rate Policy Under An Open Economy

Since the implementation of the first exchange rate reform in 1994,the extent of economic opening degree is being increased.At the same time,limitations of exchange rate policy have become more obvious,and contradictions between monetary policy and exchange rate policy have also been more evident.It is of great significance to doing the research about the contradiction between them.First this article made a practice analysis about China monetary policy and exchange rate policy since 1994.In empirical analysis,we selected the first quarter of 1996 to the fourth quarter of 2014,76 quarter sample data,constructed a forward-looking reaction function to analyze the effect of exchange rate changes on monetary policy rules by introducing the exchange rate factor of the Taylor rule.Secondly,through the establishment of a dynamic feedback mechanism between the tool of exchange rate and monetary policy simple variables,we choose the broad money supply and the interest rate as the main explanatory variables,the foreign exchange reserve balance and the Sino US rate spreads as control variables to study the long-term cointegration relationship between the exchange rate and the variables of the study.We draw the following two conclusions:First,the real effective exchange rate gap response coefficient is negative,its absolute value is large,it explains that the central bank monetary policy largely considered the exchange rate fluctuations,i.e.,the aim to achieve the goal of exchange rate damages the independence of monetary policy in China;Second inflation gap coefficient is less than 1,explaining the inflation of our country has the self realization mechanism.Third,VAR model results that exchange rate would not only indirectly affect interest rates through inflation and output,but also as an independent variable to directly influence the central bank interest rate adjustment.Therefore,China's monetary policy is restricted by the current exchange rate system to a great extent to realize its independence.Especially in the deterioration of the external environment(such as during a financial crisis),monetary policy making exchange rate stability as the goal will make the economy deviates from its equilibrium value.Second,between the real effective exchange rate,China's seven day interbank rate,the broad money supply,the foreign exchange reserve balances and Chinese interest rate difference there exists cointegration relationships.Effects of broad money supply and foreign exchange reserve balances on the exchange rate is larger,seven days interbank offered rate and Sino US spreads to the real effective exchange rate is not obvious.The reasons may be:(1)The capital items has not widely opened,there has still existed capital constraints;(2)China's interest rate is not fully market-oriented,the short-term interest rate mainly through the financial market affects exchange rate,many obstacles still exist and delay the interest rate,exchange rate linkage coordination process;(3)Current monetary policy mainly chooses the money supply as intermediary target supplemented by interest rate.Last,in order to solve the conflict between China's exchange rate policy and monetary policy,this paper put forward suggestions based on exchange rate policy and monetary policy two sides.