The Feasibility Study Of Inflation Targeting Implementation In China

Appeared in the 1990s, Inflation targeting, which greatly unified regularity and flexibility together, is a new monetary framework. Many countries gave up the traditional monetary framework and turned to inflation targeting under the circumstance of serious inflationary pressure, loss of effectiveness of monetary policy, and institutional change of independence strengthening of central bank. The practice has proved that the inflation targeting has gained a great achievement in different aspects, for example, lowering inflation rate and stabilizing commodity prices, improving the environment for economic performance and fuelling economic growth, enhancing the transparency of monetary policy, strengthening people's trust and confidence to government, and so on. In China, we implemented the monetary policy of double nominal anchor pegging. However, this policy has serious memory conflict existed which resulted in facing with the dilemma in our monetary policy implementation process. At the same time, it makes the effect of our monetary policy have a greatly reduced quality. Against this background, it is will be a rational choice for our country to take inflation target reducing as the nominal anchor of our monetary policy. Therefore, to strengthen the independence of central bank and to improve perspectiveness and effectiveness of monetary policy, now it is a cryingneed to do a positively feasibility study of Inflation Targeting Implementation in our country.At first, according to the systematical introduction to inflation targeting and deep analysis of inflation targeting implementation conditions, it provides a reference to reconstruction of our monetary framework. Secondly, from the angle of intermediate target and Granger casual relationship test, through empirical analysis in the data during 1996-2008, it found that the money supply controllability and measurability decreasing and the functional relationship of final target of monetary policy becoming instable, caused effectiveness decreasing of money supply target. However, pegging exchange rate targeting results in international trade double surplus, this situation caused by pairs of endophytism of money supply has seriously interfered with the money supply targeting. From the angle of conduction mechanism, using Cointegration Test, Vector Error Correction, Granger casual relationship test and impulse response function to do an analysis to our conduction mechanism of monetary policy from 2000 to 2008, it also found that the monetary channel and trust channel did not play an important role in conduction mechanism of monetary policy during the period of 2000-2008. In contrast, it is more effective to apply monetary channel as conduction mechanism of monetary policy instead of trust channel in our country. At last, combined with required precondition of inflation targeting implementation, it analyzed the probability of implementing inflation targeting in our country. It evaluated the optimal level of inflation on the basis of applying time-varying parameter model and made it to be the target value of inflation. At the same time, applying state space model to fit the relationship between GDP and CPI, Based on the above analysis, it puts forwark China's implementation of the concept of inflation targeting in transition period.