Economic Openness And The Effectiveness Of Monetary Policy

In the era of economic globalization, no country or region can not be completely to carry out economic and financial decision-making independent, this is a fact known to all. However, how the impact of the economic openness to a country’s macroeconomic policies, especially economic openness of a country’s impact on the effectiveness of monetary policy, there is no consensus view.We study in the new open economy macroeconomic framework, first of all to join the international financial markets transaction costs and staggered wage adjustment assumptions, build a basic model to analyse the monetary policy,the model is derived through the analysis of monetary shocks to the money market, product markets and factor market and general equilibrium analysis in the framework of analysis of non-tradable goods and transaction costs affect the effectiveness of monetary policy.Then we consider the effectiveness of monetary policy based on the model factors to economic openness-trade liberalization and international financial openness, the expansion of basic model for economic openness and the effectiveness of monetary policy analysis model, analysis the effectiveness of monetary policy on the exchange rate,consumption and output. And use the calibration method, simulated staggered wage adjustment model in different degrees of trade liberalization and financial openness, analyse the impact of the monetary policy on the exchange rate, consumption and the output. The method simulated the main of micro-behavior, to give the calibration value, through the model of the main micro-economic calculated impact of macroeconomic from econometric theory, and the impact of the openness of the effectiveness to monetary policy. Our model analysis showed that:(1) trade openness and financial openness slowed the rate of increase of the phenomenon of short-term overshoot, that is, the greater the degree of economic openness, the currency impact caused by the smaller magnitude of exchange rate adjustment; (2) as openness increasing, making the prices of domestic products to reduce staggered, which is caused by monetary shocks the price level adjustment raise, therefore, real money balance effect caused by the currency impact on the formation of the declined, a corresponding reduction in the growth rate of consumption; (3) in an open economy, the exchange rate overshoot caused by money supply shocks weakened, import and export growth rate is smaller than expected at the same time, the increase in financial openness, the monetary authorities control the money supply has declined through the interest rates will stimulate investment and reduce incremental, so the higher the degree of economic openness and monetary policy affect the output capacity of the weaker; (4) With the increase in economic openness, the money supply may be a certain degree of endogeneity, therefore, monetary policy authorities must pay more attention to the level of inflation to avoid the domestic economy to external shocks arising from severe fluctuations in the maintenance of stable financial environment and the promotion of economic and technological development.Followed by empirical analysis, to verify the economic openness of China’s impact on the effectiveness of monetary policy, we believe that the study of the effectiveness of monetary policy, it is necessary to separate from the monetary policy tools, monetary policy transmission channels and the ultimate goal of monetary policy to the point of view, monetary policy effects is to study the specific terms of the economic openness of China’s monetary policy tools to choose the impact of economic openness in China’s monetary policy transmission channels for the role, to explore whether the effects of economic openness to reach the ultimate goal of monetary policy, as well as the specific economic openness on the the impact of monetary policy. In this paper, the evidence was found:(1) from the point of view of monetary policy, trade openness and financial openness has a stable effects to the base currency, with the increase in economic openness, for the increasing endogenous of base money, the central bank control the ability of base money been lowered. (2) from the monetary policy point of view, trade openness and financial openness are affected the main channels of monetary transmission, of which, trade openness Granger credit reasons conduction; conduction rate of trade openness and financial openness Granger causes; the stock market value and financial openness Granger causality to each other; financial openness and trade openness Granger are the reasons for the exchange rate, as China’s exchange rate system reform and development, open economies the exchange rate under the conduction the role of the channels will be further apparent.(3) from the point of view for the ultimate goal of monetary policy, the financial openness of conduction channels through the interest rates and capital market impact of transmission channels of price level, price level increased with the financial openness, therefore, for the higher degrees of financial liberalization, the central bank’s ability weaker to control the prices, and the effectiveness of monetary policy lower; trade openness and the money supply and output had the cointegration relationship stability, and in the long run the level of output by the impact of trade openness with persistently, trade openness impact on output is greater than the impact of money supply done.Finally, this paper give policy recommendations to enhance the effectiveness of China’s monetary policy, that is under the conditions of an open economy in China’s macro-economic policy must be the internal coordination and external coordination of the combination of monetary policy and financial supervision combination. China’s government and monetary authorities need to focus on domestic monetary policy and fiscal policy coordination, strengthen the international monetary policy coordination, and improve supervision of domestic financial system, strengthen international coordination of financial supervision.