The Empirical Analysis Of Nonlinear Taylor Rule Based On Flexible Dynamic Financial Condition Index

The study on monetary policy has always been the main emphasis of macro-economics for monetary policy has a no negligible effect on macroeconomic performance.An objective of traditional monetary policy is to keep price level steadily.Nevertheless,with the continuously development of global capital markets,policy makers are in face of a big challenge that asset prices change sharply while CPI staying flat.In the context of the "New Normal" featured by slower growth and more optimized structure that China's macro economy has stepped into,monetary policy is endowed with unusual meaning.Especially since China's Macro Prudential framework has not been perfect yet,acting according to inflation might not meet prudential requirements.Thus,researchers wonder if there is a reference index serves for policy makers as a comprehensive measure of macroeconomic performance instead of CPI.Based on the MI-TVP-SV-VAR model with flexible dynamic mechanism,this paper constructs a Flexible Dynamic Financial Condition Index(FDFCI)including interest rates,real effective exchange rates,stock prices,house prices as well as commodity prices factor;Then,bring FDFCI as an informative variable into linear and nonlinear Taylor rule respectively and find that:First,the empirical result shows that FDFCI with international commodity price index could forecast inflation effectively especially in short time and is competent as reference index for monetary policy operations.Second,no mater using which method,GMM or STR model,considering FDFCI will improve the fitting results of Taylor rule.Furthermore,the Taylor rule including FDFCI based on these two methods has better stability,indicating the Taylor rule considering FDFCI can be applicable to China's monetary policy.Third,Taylor rule in China shows significant nonlinear feature.The empirical analysis indicates that whether add FDFCI into the function expression of Taylor rule or not,the STR model passes nonlinear tests and there are better results than in a linear one.Finally,in view of monetary policy practices and financial market reform requirements at present,this paper advises taking the FDFCI including international commodity price factor as a reference index of monetary policy and we could dredge conduction mechanism of monetary policy and promote transformation of monetary policy framework to price-based through building interest rate corridor and improving monetary policy transparency.