Optimal Monetary Policy Rules In Inflation Targeting System Research

Inflation targeting, initially adopted by New Zealand in 1990, is a new monetary regime. The regime takes the propositions that an increase in the monetary supply is neutral for output and employment in the medium-to-long run, and is not neutral in the short run as theoretical foundation. The dependence of central bank and marketization of interest rate is taken as the regime basis of inflation targeting. The basic premise of inflation targeting is that price stability is the main and basic goal of monetary policy. The main characters of inflation targeting are that the country, which adopts inflation targeting, must have an explicit quantitative inflation target; and there is usually no explicit intermediate target, such as monetary supply or the exchange rate. Monetary policy making must be open and transparence. The central bank is required to gear monetary policy instrument in the guide of monetary policy rule and to take responsibility for achieving of inflation target.The practical experiences of monetary policy in those countries that adopt inflation targeting show that inflation targeting has prominent advantage on achieving the goal of low and stable inflation. During the past years till now, there has been eighteen countries to explicitly adopt inflation targeting.The emerging of inflation targeting should be due to the consistency agreement with monetary policy goal, that is, price stability is the main and basic monetary policy goal. Dynamic inconsistency theory shows that discretionary monetary policy would inevitably lead to an inflation bias. Comparing with discretionary monetary policy, inflation targeting has greater advantage on achieving the goal of price stability. Failure of monetary supply as intermediate target promotes the wide spread of inflation targeting.China central bank has adopted discretionary monetary policy regime since its central banking system established and has taken monetary supply as the intermediate target of monetary policy since 1996. The practical experience of monetary policy in China shows that the existing monetary policy hasn't shown...