On The Targeting Regimes In Monetary Policy Framework

This paper focuses on the operational norms of monetary policy based on the international experiences. After the breakdown of Bretton woods system in 1973, the countries all over the world have adopted various monetary policy frameworks, which is aimed to enhance the credibility, transparency of monetary policy and the accountability of central banks. With the time going on, policymakers have reached the consensus that price stability is the overriding and long-run ultimate objective of monetary policy, and monetary policy should be operated on rules rather than without any constraints.The fact that many central banks use explicit targets in the monetary policy framework is a kind of conspicuous phenomenon during the last three decades. Some evidence has showed that the targeting regimes were correlated with the performance of monetary policy operations. Currently, the targeting regimes adopted by central banks include exchange rate targeting regimes, monetary targeting regimes and inflation targeting regimes, which are the topics of this paper. The main contents of this paper are as follows:Chapter 1 is the introduction of the whole paper. The research background, research literature and some key words are explained, and the significance, methodology and main innovations of this paper are also introduced.Chapter 2 focuses on the historical evolution, inherent characteristics and ultimate objectives of monetary policy based on the political-economy stance. The simple look-back of monetary policy indicates that the monetary policy is in itself a political economic issue; both economic factors and political factors can affect monetary policy behaviors. Owing to the famous Lucas Critique and the flourish of the game theory in the 1970s, the monetary policy is interpreted as the interactions between central bank and private agents. Furthermore, according to the current monetary regime and the theoretical and empirical researches about the efficiency of monetary policy, price stability is the overriding, long-run ultimate objective of monetary policy.Chapter 3 deals with the dynamic inconsistency problem, inflation bias in the monetary policy operation and its solutions. As the central bank is the source of the money and credit, the behavior of money supply should be examined in the first place when there exists the fluctuations of price level. In the dynamic game process of monetary policy, central bank may launch unanticipated inflation with such different incentives as increasing employment rate or output level, financing the fiscal deficits,improving foreign trade conditions and maintain financial stability. In order to eliminate the inflation bias and enhance the credibility of monetary policy, some kinds of incentive constraint mechanisms, such as reputation mechanism, principal-agent approach and targeting regimes, can be introduced into the monetary policy framework. Targeting regimes represent a kind of precommittment by the central bank, which can anchor the inflation expectations of private agents and restrict the opportunism of the central bank itself.Chapter 4 is dedicated to the mechanisms and effects of exchange rate targeting regime. Exchange rate, in general, can serve as free variable, policy tool and nominal anchor. Exchange rate targeting regime, which includes adjustable pegging, collective nominal anchor and currency board, emphasizes that the domestic currency should be targeted to the anchor currency, through which the credibility of monetary policy can be enhanced. Exchange rate targeting regime have suppressed the inflation inertia and high inflation effectively, but it may encounter such problems as the conflicts between the internal equilibrium and external equilibrium, the losing of monetary policy independence, exchange rate misalignment and fragile to speculative attacks. So, it's necessary for those governments who adopt the exchange rate targeting regime to take the exit strategies into account.Chapter 5 is dedicated to the mechanisms and effects of monetary targetin...