The Conflicts And Coordination Of Monetary Policy And Exchange Rate Policy Of China In Open Economy

In open economy, the optimal state of one country's macro-economic control is to realize its internal and external equilibrium. Traditional Tinbergen Principle points out that some mutually independent policy instruments are necessary for one country to realize its several mutually independent policy objects. Swan Curve further proves that monetary policy is the basis of internal equilibrium of one country, while exchange rate policy is the key to external equilibrium. Therefore, the coordination of those two kinds of policies is an important condition for one country to realize its internal and external equilibrium.With the increasing pace of capital account openness in China, the conflicts between monetary policy and exchange rate policy are inevitable at the macro-economy running moment. Thus, the coordination of those conflicts has gradually drawn much attention from academic field and decision-making authorities. This research will attempt to contribute to the study of conflicts and coordination between those two policies so as to set foundations for China's long-term policy selection in open economy. In long views, the final object of China's policy coordination is to maintain the independence of monetary policy, the free flow of capitals and the complete floating of RMB. The author, in perspective of traditional exchange rate determinism, illustrates the internal relationship and mutual reaction mechanism between monetary policy and exchange rate policy in open economy, and then by applying the extended "impossible triangle" hypothesis, tries raising a guideline to realize the final object of China's policy coordination. At the same time he schemes out the domestic mid-term strategy and short-term plan to coordinate the conflicts between monetary policy and exchange rate policy by adopting policy coordination theory in open economy. In the end, on the basis of analysis above, the author puts forward four suggestions to the realization of long-term policy selection.This thesis consists of five parts. The first part mainly introduces the policy object of one country in open economy and the available policy instruments and in the meantime illustratesthe internal relationship and mutual reaction mechanism between monetary policy and exchange rate policy. The second part reviews the conflict and coordination theory of macro-economy policy in open economy in order to provide theoretical foundation for the conflicts and coordination between monetary policy and exchange rate policy of China. The third part analyzes the running state of current domestic monetary policy and exchange rate policy, pointing out the deficiency of exchange rate policy in operation and the orientation of monetary policy. The fourth part firstly gives an analysis of four conflicts between monetary policy and exchange rate policy sine 1994, discussing the experience of the authorities' coordinating those two kinds of policies, then according to domestic macro-economy running state, raises the final coordination object and the guideline to realize this object and at the same time works out the correspondent mid-term coordination strategy and short-term coordination project. The last part, based on the current status quo of open economy, puts forward four long-term measures to strengthen the coordination between domestic monetary policy and exchange rate policy.