Effectiveness Of Monetary Policy And Policy Coordination

Under the circumstance of open economy, the trend of world's economic and financial integration is being reinforced. As an important instrument of government's macro-regulation, the function of monetary policy and exchange rate policy has been enhanced, which brings the new open economy macroeconomics founded in the firmly micro-foundation to be the hotspot of academic research. The model of Obstfeld & Rogoff and its development afterwards made a new open economy macroeconomics come into being. With the introduction of micro-foundation and the usage of welfare and total utility analysis method, the analysis and explanation to the real international economy phenomena based on the new theory workhorse model are more persuasive than traditional international economics theory without micro-foundations. By the resolution of maximized welfare and total utility, the model ensures the explicit welfare analysis and policy evaluation to the macro-economy policy could be done.According to the thoughtway of new open economy macroeconomics theory, we build up the optimized monetary policy of the small open economy with interest rate regarded as the instrument of monetary policy. Combining current economy circumstance of China, this paper shows the validity of monetary policy and the coordination between monetary policy and exchange rate policy of China. The revelation based on the theoretical and practical research is also given to improve the execution effectiveness of monetary policy.By analyzing the monetary policy and exchange rate policy of small open economy, and the theoretical and practical research, the paper reveals that the effectiveness of monetary policy of China is being relatively weakened. Although the inflation target set by the model exists some differences with the realistic policy executions, the conclusions of the model shows that in the fields of preventing and controlling inflation, the effectiveness of monetary policy of China is very effective.But for the influence of several other factors, the effectiveness of monetary policy is less prominent than closed economy, and has been becoming a dependent factor to the target set by the monetary authority.