| The Mead's theory of the policy cooperate came from the thinking of the open economy must face the conflict between internal and external balance. Tinbergen's research let me know the basis about the policy objectives and the policy tools. To achieve the number of policy objectives, a country must have at least the same number of independent policy instruments. The work of R.A.Mundell advanced the theory of the policy cooperate a major step forward. They made expansion model based on IS-LM model and used it can research the effect of different exchange rate system on the role of monetary policy and fiscal policy in a country. The model named Mundell-Flemming model became the workhorse of the open economy macroeconomics research.The basic conclusion is come from Mundell-Flemming model is that the amount of money under a fixed exchange rate system was born within the international balance of payments. At that time it can not as a monetary policy instrument and also it can not play the role of counter-cyclical. Another if under a floating exchange rate then the monetary policy become an exogenous variable and it can be used as a policy tool. The conclusion of Mundell-Flemming model was later described it as "Impossible Trinity" by Paul Krugman. It means that the free flow of capital and independent monetary policy and exchange rate stability for a country to achieve the three objectives is impossible. The conflict performance between exchange rate and monetary policy is clear here. If under a basis for choosing a freely floating exchange rate, a country be able to enjoy the independence of monetary policy and the free movement of capital; If the choice is the exchange rate stability, a country only have one election between the monetary policy independence and the free movement of capital; If giving up the independent monetary policy, a country can obtain the stability of the exchange rate and the free movement of capital both. It is "Impossible Trinity" give us a basic understanding about the interaction of the exchange rate system and monetary policy as a country is the open economy.In this paper, base on"Impossible Trinity " perspective, we can not explain the affect between exchange rate and monetary policy in China. There is three reasons. First is that the ongoing exchange rate system is neither full fixed or full floating system in China and the central bank manage of the exchange rate floating. Second the RMB is not freely convertible under the capital account. Due to the existence of capital controls, China's capital flows are not free. The last is that China's monetary policy affects economy by both the money supply and interest rates, but interest rate can't be decided by market, so the interest rates are still relatively conspicuous control by the government.Although the actual situation in China can not use the " Impossible Trinity" to explanation, but the theoretical basis of " Impossible Trinity ", that the Mundell-Flemming model can provide the analytical basis of the exchange rate regime and the role of monetary policy framework. If the Mundell-Flemming model is the foundation for the expansion of suits our country circumstances, this expansion may be used as a model to analyze the impact of the role of monetary policy on China's exchange rate system. By analyzing the exchange rate fluctuations on the impact of interest rate and currency we can study the exchange rate fluctuations on the role of monetary policy in China.Firstly, change Mundell-Flemming model with capital flows is not entirely character. By the new Mundell-Flemming model researching finding that there is an inherence relationship between exchange rate, currency and interest.Next there is using empirical analysis to research the interaction between exchange rate, currency and interest. On the data choice, the interest rate use one year deposit rate data. Because the nominal exchange rate fluctuations do not represent the real economy. Exchange rate use REER (real effective exchange rate). M2 is choice to representatives of the monetary policy operation on currency. Due to the exchange rate, interest rates and currency supply data are non-stationary data, but after the first order differential data are smooth, According to this data's features, co-integration method is the good way to analyze the relationship among the three. The Johansen co-integration test indicates that there is one co-integration relationship between exchange rate, interest rates and currency. On the basis of co-integration relationship, a vector error correction model (VEC) can be found by exchange rate, interest rates and currency. Giving Granger causality test to the exchange rate, interest rates and currency, the test indicate that the exchange rate and interest rates is Granger cause for each others and exchange rate and currency is Granger cause for each others too. On the basis of VEC model, we can use the impulse response function (IRF) and variance decomposition (VD) to analysis the effect between the exchange rate and currency, the infection between the exchange rate and interest. The analysis shows that exchange rate fluctuations have some effect on the interest; exchange rate fluctuations have little effect on currency; the currency have strong effect on the exchange rate. The conclusion is that the influence of exchange rate fluctuations on monetary policy in China is very limited.Based on China's exchange rate fluctuations on the role of monetary policy can be sure that there is an inherence relationship between the exchange, interest rates and currency, the exchange rate fluctuations will affect the monetary policy. Based on our empirical data we found the currency have a great impact on the reel exchange rate. Because the reel exchange rate fluctuations influence the international payments, so the currency will affect a country on both internal balance and external balance. For that the proposal of our country monetary policy is that using the currency as a tool for the implementation of monetary policy must be prudence, improper application will create a potential monetary policy risks. |
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