Choice Of Monetary Policy Of Central Bank

Since January 1,1984,the People’s Bank of China assumed the functions of the modern central bank.In the short run,central bank faces three major problems:reducing the unemployment rate,maintaining price stability and balance of payments.These correspond to three short-term macroeconomic objectives:reduce the unemployment rate,stable inflation and stable exchange rate.This paper attempts to find how the central bank can achieve its short-term macroeconomic objectives by using monetary policy and exchange rate policy.In addition,in the 30 years’ monetary policy and exchange rate policy practice of the People’s Bank of China,we found that there may be some conflicts in its policy objectives.Under open conditions,there may be a conflict between price stability targets and exchange rate stabilization targets.In order to compare the effect of the central bank’s different policy rules and a way to mitigate conflicting policy objectives,we use the actual data of the Chinese economy to establish a new Keynesian model.We simulate the operational trajectory of actual economic variables under different policy rules.We conclude that if the economy encounters technical shocks,aggressive interest rate rules are conducive to stabilizing prices,and negative interest rates are conducive to stabilizing output.As long as the central bank can focus on inflation levels and future welfare levels,any central bank can increase social welfare.If the economy and society encounter technical shocks,the full floating exchange rate system can better stabilize domestic prices,and the exchange rate system tied to a basket of currencies can better stabilize the real exchange rate.Under different target conditions,monetary policy makers’ views on various monetary policies and exchange rate policies should be different.First,the central bank is still through direct or indirect controlling the amount of money to achieve its desired objectives under closed conditions.This paper wants to find the rules that the central bank should use to determine the amount of money in the society and the problems that central bank may be encountered in executing the specific rule.As the central bank is difficult to accurately control the currency of commercial banks to create and the currency circulation speed,so the construction of interest rate rules may be a good way to the central bank.However,the rules can either be positive or negative.In order to compare the different effects of positive interest rate rules and negative interest rate rules on real economic variables,we will construct dynamic new Keynesian model to achieve this purpose.According to the theory of Kydland and Prescott,the central bank’s goal can be set to maximize the social welfare or minimize social losses.Social loss function is considered as a quadratic function of output and inflation.Marginal loss increases as inflation increases.Policy-makers can set certain rules to achieve low and stable inflation.It can also minimizes the difference between the output and a smooth trend.The monetary authorities formulate the interest rate rules on the basis of a predetermined social welfare function.The MP curve according to the interest rate rule and the New Keynes IS curve are drawn together to arrive at the demand curve.The demand curve,along with the supply curve from the new Keynesian Phillips curve,achieves the equilibrium of all markets.We use empirical research to conclude that if the economy encounters technical shocks,positive interest rate rules are conducive to stabilizing prices,and negative interest rate rules are conducive to stabilizing output.How to implement interest rate rules depends on the current economic situation.After comparing aggressive interest rate rules and negative interest rate rules,we want to discuss the central bank’s key characteristics.In order to achieve this goal,we will consider the currency or the monetary system as public goods.The monetary system in this article has a special meaning.It simply means that the central bank can use this system to facilitate transactions between economic participants and directly or indirectly control the amount of money in the society to achieve its policy objectives.Providing a monetary system better than not providing a monetary system should not be repeated.Then the question should be that how much money is to be provided.In this paper,we use the amount of money to measure the monetary system.It is because that the optimal number of traditional public goods depends on the marginal benefits and marginal social cost.Money cannot give people a direct utility.It changes social welfare levels by changing the level of output and price.Using the solution of the time inconsistency model,we use the empirical study of the conclusion that the central bank’s key characteristics is independence.We find that as long as the central bank policy-makers can attach importance to inflation and future benefits.Every forms of central bank will have the opportunity to provide optimal supply of money.Finally,we discuss the exchange rate policy of the central bank under open conditions.We use DSGE model under open conditions as our basic model.At the same time,we use a Bayesian estimation to methods simulate the differences between the exchange rate regime.If the economy suffered the impact of technology,bounding a basket of currencies exchange rate is good at stabling real exchange rate.According to international trade theory,we know that the real exchange rate can affect the net domestic exports to a greater extent.At the same time,the real exchange rate depends not only on the nominal exchange rate,but also on the level of domestic and foreign price ratio.We use empirical research results to find that bounding a basket of currencies exchange rate regime is not only good at promoting the stable nominal exchange rate,but also good at promoting the real exchange rate stable.Just like in the short-term conditions,we compare inflation and output based on the Phillips curve.How to use Floating exchange rate system and focus to a basket of currencies exchange rate system reflects our need to compare the actual inflation and exchange rate fluctuations.The actual focus also has to rely on the target welfare function of policy makers.If policymakers think domestic price volatility is greater than the threshold,then they need pay more attention to the floating exchange rate system.If policymakers feel that the volatility of the exchange rate value is greater than the threshold,then they need pay more attention to a basket of currencies exchange rate system.Due to domestic labor costs and foreign economic downturn,our exports face downward pressure since 2013.Our foreign exchange reserves fell sharply,the RMB is facing devaluation pressure.All the data make people think the situation of financial crisis in Asia.The Fed may raise interest rates this year.If the People’s Bank wants to stabilize the RMB’s exchange rate,it may have to raise the domestic interest rate.Under the conditions of increasing pressure on China’s economic growth,the rise of interest rates will increase the financing pressure of enterprises.This makes the pressure on the real economy worse.In our country’s previous currency and exchange rate policy experiences,we stable the RMB exchange rate level,while the expense of the stability of the price level.Possible reasons may be the People’s Bank needs the confidence of market.In some special period,because of the Chinese government in a clear statement of RBM does not devalue,if the central bank does not stabilize the RMB exchange rate,not only undermine the reputation of our government,but also affect the market confidence.If the market confidence is damaged,it may cause incalculable losses to the economy and society.Through the restrictions on capital projects to stabilize the RMB exchange rate at a certain level will also cause huge cost to our economy.This is in conflict with our further efforts to strengthen the marketization of interest rates.Unbalanced interest rates can cause mismatches of resources and result in inefficiencies.When the economy is facing downward pressure,the same level of RMB exchange rate will also affect the international competitiveness of export products.This makes the government must use a variety of financial means to help export enterprises.How to coordinate the conflict of the monetary policy objectives and exchange rate policy needs to further thought.The innovation of this paper is mainly reflected in the following aspects.First,the article has a strong comprehensive across the microeconomics,macroeconomics,new institutional economics and new political economy.We use the perspective of public goods to see the monetary system.Second,on the basis of the Kydland and Prescott model,we change the supply curve from the Lucas supply curve into the New Keynesian Phillips curve.DSGE model and the original macro-model sometimes have different results in many basic issues.For example,the inflation inertia of the short-term Phillips curve in the original macro model is transformed into the inverse inertia of inflation in the DSGE model.Of course,the most obvious difference of the DSGE model and the original macro model may be micro-foundation.Traditional macroeconomic models cannot measure a variety of economic policies through natural welfare standards.Last,previous studies have used traditional methods to estimate parameters when they deal with open-economy DSGE models.However,the reality of the model parameters may not be determined variables,but random variables.In this case,this paper tends to estimate those dynamic parameters by the Bayesian method.