The Choice Of Intermediary Targets Of Monetary Policy In Mongolia's Economic Transition

Mongolia is the only Asian country to choose radical economic reform model of Eastern European for economic transformation.The radical economic reform model has brought many problems to Mongolia.The core issue of Mongolia during the economic transformation period is how to reduce the price level and restrain the high inflation rate.The inflation rate reached 325.5% in 1992.The central bank issued money to cover the fiscal deficit.In 1993,the money supply increased by 227.6% year on year,and the inflation rate increased up to 420%.The Central Bank of Mongolia took anti-inflation as the ultimate goal of monetary policy and money supply M2 as the intermediary target by implemented a tightening monetary policy.The inflation rate dropped to 6% in 1998.In the second half of 2007,the Central Bank of Mongolia abandoned the intermediary target of money supply and it is clear that the inflation target will be made into the future monetary policy framework,and the intermediate target of monetary policy changed from money supply to inflation rate.However,Mongolia has not formally adopted the inflation targeting system,and has been preparing to introduce the inflation targeting system.Therefore,the research results and suggestions are of great significance to Mongolia.This paper is mainly divided into the following four aspects.First,through the literature and macroeconomic data related to economic transformation,this paper analyses the current situation of economic transformation and financial development in Mongolia.Second,this paper studies the choice of intermediary target of monetary policy in the early stage of economic transformation and the choice of intermediary target of monetary policy in the process of economic recovery.Then it studies the reasons why Mongolia abandoned the intermediate target of money supply.At the same time,we select the relevant data from 1997 to 2007 and use the regression model VAR to test the effectiveness of money supply intermediary target.Finally,the adaptability of Mongolia to the inflation targeting system is studied.The paper reaches the following conclusions: In the early stage of economic transformation,the Central Bank of Mongolia restrained high inflation by controlling the money supply.However,The correlation between money supply and price stability has been weakening since 2000.Also,the controllability of monetary policy has been weakening due to the increasing deviation between the target value of monetary policy and the real value,and the rising monetary multiplier.As a result,the target system of money supply is difficult to continue to implement.Mongolia abandoned the intermediate target of money supply in 2007.Next,the empirical analysis of the effectiveness of the monetary policy intermediary target shows that the monetary supply intermediary target produces the expected effect on the output level,but does not produce the expected effect on the price level,that is,the final objective of monetary policy,which indicates that the monetary supply intermediary target is ineffective.Eventually,in the second half of 2007,the Central Bank of Mongolia made it clear that it was necessary to prepare for the shift of monetary policy towards inflation targets.However,the conditions for Mongolia to implement inflation targeting system are not yet ripe.The author believes that Mongolia needs to implement inflation targeting system.Based on the previous research,the author puts forward some policy suggestions for Mongolia to implement inflation targeting system.