A Study On The Application Of Interest Rate Smoothing Theoretically Based On Its Economic Desirability

Monetary policy, as an important macroeconomic policy, is subject to stabilizing the value of money by all kinds of monetary policy tools. The practical effect of monetary policy is not only related to the desirable policy tools,but also to the conducting pattern or martingale by which monetary authorities affect the macro-economy. And monetary policy theory and practice is still a burgeoning task in China. During the course of economic transition to market-oriented economy, it is very profound to enhance monetary policy effectiveness by bettering monetary policy efficiency and to advance the economic growth and economic development of China.Interest rate smoothing is the inevitable direction of our monetary policy conduction. Interest rate smoothing has been a ubiquitous conducting pattern in the main developed countries such as America, England, Canada, EU etc. In these years, the People's Bank of China changed its pattern of base rate adjustment by 0.27 percent, which shows that central bank has paid attention to the effect of conducting pattern to economic performance. Central Bank wants to reduce the economic shocks from policy change to macroeconomic volatility. Based on two perspectives as central bank and micro foundation, the dissertation is focused on the conducting mechanism of interest rate smoothing and emplore the combination between interest rate smoothing and our transitional economy. Furthermore, the dissertation shows another path for improving the market-oriented economic system construction from monetary policy conduction. In transitional economy, there are many kinds of shock source come from aggregate supply and aggregate needs and systematic transition and external economy disequilibrium. Our monetary policy framework has not come into being, money quantity is the intermedial goal of monetary policy, which characterizes our monetary policy as quantitatively conducting. Thus it is difficult to search for the equilibrium state of economic supply and needs.Following the trend of macroeconomic theory showing its main attention to micro-foundation, the dissertation discusses several problems about the action mechanism of interest rate smoothing on macro-economy and its desirability for our transitional economy: (1) Discussing the importance and necessity of enhancing our country's monetary policy effectiveness. (2) Demonstrating the desirability of interest rate smoothing with US quarterly data and our continuing to deepen enterprises reform to boost up the sensibility of micro body to economic and policy's signal. (3) Analyzing the searching mechanism for macroeconomic equilibrium of interest rate smoothing based on its macro desirability and micro desirability, and integrating the separate policy effects into a systematic framework. (4)Exploring the path for interest rate smoothing to enhance the monetary policy effectiveness by bettering the monetary policy efficiency and smoothing the adjustment routine, and further the effectiveness of searching mechanism. (5)Analyzing the supporting and restricting condition in our transitional economy, and prospecting the monetary policy design based on the effectiveness of interest rate smoothing and the necessity to gradually apply interest rate smoothing to our monetary policy conduction.In order to analyze the problem of applying interest rate smoothing to our country's macroeconomic adjustment based on its macro and micro desirability, this thesis is constituted by five parts. The main structure and viewpoint is arranged as follows:In the first part, it discusses the essentiality and realism significance of our country's monetary policy conduction by interest rate smoothing based on defining its concept.In the second part, it analyzes the historical origin and the changing environment of the conducting pattern as interest rate smoothing from the foundation of FRB of America in 1914, then this part reviews the gradually changing process of interest rates from controlling to marketing with adjusting the macro-economy at the beginning of our Republic Country. Before the reform and opening to the aboard, interest rates were completely controlled at a certain level ,which made interest rates not able to adjust the economic performance. So this part picks out an important question that marketerization is the necessary condition for interest rate smoothing, and it is a gradual process to introduce smoothing into our monetary policy framework.In the third part, monetary policy rule model with interest rate smoothing is constructed to show the logic process of macro desirability of smoothing and dynamic general stochastic equilibrium model is used to show the logic process of micro desirability of smoothing. By contrast of macroeconomic policy effect between introducing and not introducing interest rate smoothing in Taylor-type monetary policy rule, we have the conclusion that with interest rate smoothing the dynamic inflation shows more stability, and the goal interest rate is more heavily affected by the long-run natural interest rate, and interest rate smoothing has a strong characteristics of macro desirability by being introduced into monetary policy rule. The concept and its meaning of interest rate smoothing can be studied in the complete theoretical framework of monetary policy rule, which makes interest rate smoothing change from an experiential and prudent conduction pattern of monetary authorities to a canonical policy measure supported by a strong theory as optimal monetary policy. Based on the dynamic general equilibrium theory, introducing some factors such as stick price and incomplete competition into a simple monetary economy with consumption externality, the simulation of US economy shows that the response of many important macroeconomic variables to technological shocks are very similar with the actual track of US economy. Also, interest rate smoothing has a strong characteristic of micro desirability. The macro and micro desirability of interest rate smoothing supply strong theoretical support for further application of interest rate smoothing in our transitional economy.The forth part is the logic extension of the third part. Based on the macro desirability and micro desirability of interest rate smoothing, the fifth chapter brings forward the innovation viewpoint that interest rate smoothing is a searching mechanism of macro economic equilibrium state in the short-run, which upgrade the status of interest rate smoothing in the optimal monetary policy framework. Not only interest rate smoothing is the optimal monetary policy conduction pattern of monetary authorities in the uncertain economic environment, but also it is a searching mechanism of macroeconomic equilibrium by means of its three typical characteristic including tiny extent and accordant direction and continuity. The essence of the searching mechanism of interest rate smoothing is the practical embodiment of"neutral"monetary policy during single-goal changing to the multi-goals and then changing to single-goal again of monetary policy, and reflect the evolution of monetary policy concept about economic persistence and micro-foundations'economic behavior. And the sixth chapter focuses further attention on monetary policy efficiency and monetary policy effectiveness of the searching mechanism of macroeconomic equilibrium for interest rate smoothing. The searching mechanism can enhance monetary policy effectiveness by bettering monetary policy efficiency and smoothing the adjustment process of economy as well as reducing social welfare loss. Interest rate smoothing relates the economic volatility to economic growth by inducing the economic direction to equilibrium which is helpful to going on developing along the long-run growth path that is subject to economic resources endowment such as population and technology and land.The fifth part explores the applicability of interest rate smoothing in our transitional economy and construct a systematic monetary policy design based on interest rate smoothing. It is necessary and applicable to depend on interest rate smoothing at different level as we have gone on transition to market-oriented economy and market has been playing the fundamental action in resources allocation. In our transitional economy, monetary authority has to make disperse use of the characteristics of interest rate smoothing at martingale level because of institutional transition and many kinds of shocks. Until monetary policy intermedial target has been transformed from money supply quantity (M2) to interest rate, interest rate smoothing then can be used systematically and steadily. According to the above analysis, our monetary policy design based on interest rate smoothing should be promoted from the following aspects: constructing the market-oriented base interest rate , and accelerating interest rate marketerization process, and deepening the state-owned enterprises reform, and enhancing the sensibility to economic change signal of micro-foundation. All these transitional condition can support interest rate smoothing to be used from martingale to mechanism with desirable economic environment and suitable market condition.The dissertation pays attention to the combination of theoretical understanding and practical application, with concentratively analyzing on the problems of optimality of interest rate smoothing and its application to our transitional economy. Two prospects as macro and micro desirability enrich the connotation of interest rate smoothing systematically. And the dissertation aim at the searching mechanism for macro-economic equilibrium of interest rate smoothing that is a helpful to our monetary policy conduction to adjust the macro-economy. Among the analysis, the possible innovation is theoretical support for interest rate smoothing from macro and micro aspects and the searching mechanism of macro-economy equilibrium state as well as distinguishing monetary policy efficiency from monetary policy effectiveness. Thus the difference between monetary policy effectiveness and monetary policy efficiency make us pay more attention to the adjusting process of macro-economy conduced by monetary policy. This dissertation maybe able to give some reference to monetary authority with theoretical support when depending on interest rate smoothing in monetary policy conduction.