Measuring The Dynamic Switch Of UK,Canada,German And Japan's Monetary Policy Targets Based On Small Open Economy MS-DSGE Mode

Monetary policy is an important issue of central bank's concerns,which serves to sta-bilize and promote the macroeconomic operation.To conduct an efficient monetary policy,the first and critical step is to choose suitable monetary policy targets,which usually include full employment,price stability,economic growth,exchange rate stabilization and so on.In practice,the targets may vary over time and across countries based on the specific macroeco-nomic situation.When estimating the monetary policy rule,one has to take the time-varying characteristics of policy targets into consideration,or there may exist estimation bias.Based on the assumption that the central bank would switch and adjust the monetary policy target according to current economic situation,this paper proposes a small open-economy Markov switching dynamic stochastic general equilibrium(MS-DSGE)model to measure the dynamic switch of monetary policy targets.The model allows the central bank to adjust the interest rate in response to three optional targeting variables,i.e.,the inflation,output and the exchange rate.Four typical small open economies are selected to test the efficiency of the proposed model.They are the UK,Canada,German and Japan,which all experienced institutional change or monetary policy reform during the sample interval.Based on MS-DSGE model,we obtain the estimates of structural parameters,and regime probabilities of each monetary policy target.We make a comparison among these countries to reveal the different characteristics of each country's monetary policy operation.Based on the estimates of structural parameters,we find that the estimates of infla-tion reaction coefficient among four countries are quite similar,while the output reaction coefficients and exchange rate reaction coefficient vary largely among four countries,and compared with inflation,the reaction to the output and exchange rate is smaller.Based on the regime probabilities of different monetary policy targets,we obtain the time interval when the central bank pegs to each target and analyze it combining with the real macroeco-nomic situation of each country.Then we find that:(1)after the implementation of inflation targeting in Britain,the Bank of England adjust nominal interest rate strictly according to the deviation of inflation rate and meanwhile responds to the exchange rate target.How-ever,the central bank of England does not consider the output target unless output growth rate declines significantly.(2)Canada has been paying close attention to inflation after implementing the inflation targeting,and interest rate has a certain degree of reaction to exchange rate and output target within the whole sample interval.(3)the main objective of the Deutsche Bundesbank is anti-inflation.The exchange rate changes are also taken into consideration,but the output is targeted only when necessary.(4)Japan's central bank was trying to stabilize the exchange rate rather than the inflation and output.To summarize,the model in this paper captures the dynamic switching characteristics of monetary policy targets in different countries.And through those results,we can also understand the central bank's monetary policy operation mechanism better.Finally,by citing and comparing the results of literature on dynamic switch character-istics of China's monetary policy targets,we find the differences between China and above four countries' monetary policy:the UK,Canada,Germany and Japan generally choose one or more important monetary policy targets,then peg to them in a relatively long interval and react to other monetary policy targets only when necessary;China would change and switch targets according to specific economic situation.At different times,the focus of monetary policy is different.Sometimes single target is preferred,and sometimes multiple targets are adopted at the same time.