China's Monetary Policy Research: 1998～2007

This paper has researched the effect of China's monetary policy from 1998 to 2007. China has experienced deflation and inflation since indirect monetary adjustment strategy, which anchor in money supply, adopted from 1998. Ten year has lapsed, How about the implementary effect? Why the actual effect always below the public's anticipation? This paper analyzes these questions from three aspects including non-neutrality of money, endogenesis of money supply and operation pattern of monetary policy with theory description and empirical study. These three aspects is not the whole influencing the effect of monetary policy, but they are the most tightly correlated aspects with effect of monetary policy as viewed from Central Bank's operation. In these aspects, money non-neutrality is the root of the paper's research which would determine the effect of monetary policy, endogenesis of money supply is the key of the paper of which the result would explain the power of controlling the money supply, operation pattern of monetary policy is another key of this research because the disadvantages of discretionary monetary policy, such as inconsistent of dynamics, lack of credibility and forward-looking character, would restrict the effect of monetary policy.This paper includes four chapters and was composed by three sectors that are formulation of the thesis firstly, analysis of the thesis secondly and conclusion of the thesis. Chapter 1 proposes the thesis, and then describes the methods and related conception before showing the structure of the paper. Chapter 2 and Chapter 3 analyze the thesis, and Chapter 2 is the theory, Chapter 3 is the empirical study. Chapter 4 gains the conclusions, which come from analysis above, and proposes some suggestions.There are three aspects conclusions. The first one is non-neutrality of money, so monetary policy is valid at the bottom; the second one is endogenesis of money supply, which is reflected from base money, monetary multiplier and total money supply, adding with lag effect, so the power of controlling the money supply is limited; the third one is discretionary monetary policy, which would make the monetary policy is not the best in dynamic process because of the disadvantages of inconsistent of dynamics, lack of credibility and forward-looking character. Therefore China's monetary policy is valid but the effect below the public's anticipation; this is the main reason why the public consider the monetary policy is invalid. Nevertheless the effect of monetary policy is enhancing this decade.This paper proposed four suggestions. The first one is broaden elasticity of RMB exchange rate, making exchange rate policy to balance external condition and furthest reducing the limitation of exchange rate policy to internal condition; the second one is enhancing the harmony of monetary policy and fiscal policy; the third one is to research the financial innovation actively, carefully and broadly; the fourth one is to select inflation rate as anchor and to establish inflation targeting as monetary policy rule.