Monetary Policy Rules And The Applicability In China

Monetary policy rules are good ways to avoid time inconsistency brought by discretion. Along with the deepening reform of financial system in China, monetary policy is playing an increasingly important role in promoting economic development. How to choose appropriate monetary policy rules in practice of monetary policy implement? It is an issue not allowed to neglect for improving the effectiveness of monetary policy.On the basis of the existing results of domestic and foreign researches, this dissertation tries to study the monetary policy rules and their applicability in China by ways of theory and empirical analysis. The theoretical part includes three chapters. Chapter2reviews the debates between rules and discretion of monetary policy. Chapter3introduces the emergence and development of monetary policy instrument rules in detail. Chapter4summarizes the operating practices of the main economies countries of the world on monetary policy and compares them with China. The empirical part consists of two chapters. Chapter5extends the response function of McCallum rule and analyzes the role of McCallum rule as a monetary policy indicator. Chapter6discusses the applicability of Taylor rule in China by modeling linear and nonlinear models of Taylor rule and testing them with Chinese data respectively.The main conclusions of this paper are summarized as follows.(1) Monetary policy rules can eliminate the deviation of inflation. Therefore, the monetary policy should be in accordance with the rules in long term.(2) The estimation results of McCallum rule with variable parameters show that the variations of exchange rate and foreign-exchange reserves affect the growth of base money notably.(3) The simulation results show that the practice of Chinese monetary policy operation following McCallum rule in general. The standard McCallum rule is more stable than modified one. It can be used as an indicator for measuring the tightness of Chinese monetary policy.(4) The interest rate policy of China has a significant characteristic of interest rate smoothing. The interest rate reacts to the changes of inflation rate and money supply growth rate inadequately, and the parameters of output gap are not significant. It shows that the linear Taylor rule may not be quite stable.(5) The nonlinear test with the inflation rate as a conversion variable shows that there is a notable nonlinear relationship which form is LSTR2between the interest rate and the inflation rate, the output gap and the growth rate of M2.(6) Nonlinear Taylor rule model was well fitted fairly consistent with the running of the situation of the real economy. When the model contains M2growth factors, the parameters of the inflation gap and the output gap significantly greatly improved, and the signs of the reaction coefficients are fully consistent with the theoretical assumptions of the Taylor rule.(7) It is not suitable for simply using McCallum rule or Taylor rule to guide monetary policy operations in China currently. But monetary policy rules can be used as a benchmark to measure and evaluate the effect of monetary policy objectively.