Research On The Effects Of Both Rule And Discretion Of Monetary Policy In China

Research on the effects of monetary policy has been the center of Macroeconomics. Under the environment of "double transformations" (one is the transformation from multi-goal to sing-goal, the other is from the paradigm of discretion to rule-oriented paradigm), the complex and ever-changing international economic situation and the change of environment of monetary policy conduction are destined to influence the paradigm of monetary policy to transform from discretion to rule. During the transformation, the changes of monetary policy arise from two sources:one is the systematic change caused by monetary authority according to certain feedback rule; the other is the component of discretion which is not expected. Under the paradigm of sole discretion, question about the monetary policy components does not exist, but when it comes to the transformation from discretion to rule, the components of monetary policy and their responding effects are essentially the hot objectives of being studied.In order to solve the questions above based on reference review and basic theory illustration, this paper analyzes the change of monetary policy conduction and the challenges that monetary policy conduction faces, the results show that China's transformation from discretion to rule has its necessity and feasibility, then the paper makes an initial screening on different monetary policy feedback rule.Based on the initial screening, this paper empirically investigates the fitness and reasonability of main feedback rules such as Taylor's rule and McCallum'rule to China's monetary policy conduction, then the paper makes a decision which rule is optimal and describes the type of rule components. The results show that McCallum's rule can describe China's monetary policy conduction characteristics best. Based on which, the paper puts both components into single equation to investigate the instant effects of different components on output and inflation. The results indicate that both components can significantly affect the economy, although the rule components'effects are bigger which means the asymmetric effects of monetary. The results also show the indeed existence of transformation from discretion to rule and it denies the neutrality proposition. In this section summarizes the paper the whole description about China's monetary policy conduction characteristics:discretion is superior to rule.Because discretion components stand a main position compared to rule components in China and single equation method can not study the time-lagged effects on each macroeconomic variable at the same time, this paper goes on investigating the time-lagged structure of discretion effects in SVAR model involving McCallum rule and Sticky Price Hypothesis as short constraints. The results show strong persistence of discretion effects. Then we compute the contribution rate of each component to economic adjustments and control. It shows that the total contribution rate of monetary policy is 25.108 percent, in which discretion components and rule components take accounts of 24.38%and 0.728%respectively. The total contribution rate of monetary policy to inflation cure is 12.59%, in which shock component and rule component take accounts of 10%and 2%respectively. The total contribution rate of monetary policy to exchange rate is 1.583%, in which shock component and rule component take accounts of 1.465%and 0.118%respectively. The paper shows that the effects on output are the biggest and effects on exchange rate are the lowest, effects on inflation is between the effects on output and exchange rate. Later, the paper constructs a simulation discretion component which has a even smaller standard error compared to original discretion component keeping the rule components unchanged, based on which the paper simulates the effects of monetary rule and monetary discretion under a rule-oriented paradigm. The results show that reducing the importance of discretion can significantly improve monetary policy effects on economic stability and reduce the fluctuation of each macro variable included in the model.In order to compare the effects of monetary policy before and afar the transformation, we model the effects of rule-oriented monetary policy. The results indicate that the rule-oriented monetary policy can not only improve the effects of monetary policy, but also can reduce the fluctuations of each micro variable such as output gap, inflation gap and exchange rate misalignment.Finally, we conclude the paper and make some useful suggestions. For example, speed up the step of transformation from discretion-oriented paradigm to rule-oriented paradigm, improve the monetary policy effects of China and strengthen the coordination of monetary policy with the others.