Our Exchange Rate Policy And Monetary Policy Coordination In The Open Economy

In open economy, the optimal state of one country's macro-economic control is to realize its internal and external equilibrium. Meade Model points out for the first time that under fixed exchange rate regimes, the government can only use the policy which affects the total demand of the society to harmony the internal and external equilibrium. So when economy is in some special states, there will be conflict between the monetary policy and the exchange rate policy. According to Mendell-Fleming Model, no matter how violent international capital flows, the conflict between fixed exchange rate regimes and monetary policy will exist. The Incompatible Triangle of Krugman shows that the three goals: fixed exchange rate regimes, free capital flow and independence of monetary policy cannot be attained at the same time.Since the foreign exchange system innovation in 1994, there were three important historical conflicts between monetary policy and exchange rate policy. These conflicts influenced the internal economy seriously. That's why we focus on the harmony of monetary policy and exchange rate policy. Since 2005, the economy' warming is speeding up, parts of the economy such as estate industry is heating. And what's worse is that pressure from inflation is getting more and more obviously. So the government imposed tight monetary policy to call back liquidity. But due to the high trade balance, and at the same time, the expectation of appreciation of RMB is strengthening itself, pressure on our exchange rate policy is getting higher. Conflict between monetary policy and exchange rate regimes still exists.What're the reasons for it? Firstly, the economy is getting more and more open, fixed exchange rate regimes weakened the validity and independency of monetary policy. The Incompatible Triangle of Kruguman is tenable in China. Secondly, as an important tool for transmit in monetary policy, interest rate is under too much control in China. In addition, the exchange rate farley changed in many years. So there is few connections between monetary policy and exchange rate policy. So it's hard for us to coordinate both the policies in time. In conclusion, the key to coordinate the monetary policy and the exchange rate policy is to keep our effort on reformation of interest system and exchange rate regimes and promote interact between them.This dissertation is trying to find the way to harmonize the conflicts between the monetary policy and the exchange rate policy in both short-time term and long-time term based on the theories above.