Effectiveness Of Monetary Policy Under The Open Economy

Since reforming and opening up, with the continuous improvement of China's growing dependence on foreign trade, large-scale capital inflows, leading directly to the largest foreign exchange reserves. Open economy will greatly promote China's rapid economic growth, but it also brought some unstable factors to monetary policy effects. Against this background, monetary policy should pay more attention on external balance than internal balance. However, the open economy has brought constraints to the macroeconomic policy. The effectiveness and independence of monetary policy has been weakening. The monetary policy transmission mechanism changes and the international economic channels become more and more important. Traditional tools of monetary policy have been weakening, such as interest rate management, deposit reserve system, refinancing and rediscount, and the open market business efficiency has improved.Based on the existing theory, this paper analyses the impact of openness to China's economy and macroeconomic policies, and analyses the effectiveness of monetary policy in theory and in empiric, considering the characteristics of China's economy. Theoretical and empirical studies showed that, in an open economy, the effectiveness of monetary policy would be weakened. In this paper, we consider the particularity of exchange rate system and asymmetric capital controls, and modified the MF. On the basis of the modified model, this paper proposes some advice to achieve the balance both inside and outside.In this paper we consider the particular exchange, rate system and asymmetric capital controls, and analyze the characteristics of IS-LM-BP curve in China. Then, the author studies the significance of the modified model to policy. But the modified model is derived from the theory, and it is necessary to specify the IS-LM-BP curve on data. Limited to the data, this paper doesn't make analysis and testing to modified model in empiric, which is the inadequacy of the paper.In this paper, there are five parts:PartⅠ: Introduction and literature review. There introduces the background, significance and the perspective of this paper. This paper studies on the internal and external research results. At present, the models of open economy target on mainly developed countries, which are not suitable to developing countries. The analyses on the balance of china and the effectiveness of the monetary policy are based on MF. MF is the most important model in an open economy, which based on strict assumptions. But some assumptions were not satisfied in developing countries, such as the free flow of capital. Many scholars relaxed the assumptions and modified the model. But the existing analysis to IS-LM-BP curve was not perfect. The fact that the BP shifts under the asymmetric control of capital was neglected. And less analysis referred to the significance of modified model to policy. PartⅡ: Analysis about the impact to monetary policy. First, China should pay more attention to external balance. Secondly, the money supply, as the intermediate goal of monetary policy, expresses strong endogenous. The relation between money supply and economy goals was weakened. Thirdly, the transmission mechanism of monetary policy changes, and the international economic channel is becoming more and more important. Fourthly, the independence of monetary policy faces a double constraint. The money supply endogenous strengthens, and there is no good method to offset. In addition, the independence of monetary policy has restricted of interest rates.PartⅢ: the modified model on MF under the special exchange rate system and asymmetric capital controls. The characteristics of IS-LM-BP curve and the significance of the modified model are showed. In the open economy, the monetary policy of increasing or decreasing the money supply is not positive. The fiscal policy is effective to influence the economy, but the effect is asymmetric. The government is able to regulate the exchange rate to influence the economy. But the government could not regulate the exchange rate level frequently within the exchange rate system in China.PartⅣ: Study the empirical effectiveness of monetary policy about open economies by using economic software. An Empirical Study results show that under the conditions of opening up, foreign exchange reserves are the money supply Granger reasons, and the money supply has a strong function that can generate more money, while the correlation between the money supply and the final output and the price level of the correlation can be reduced. Final outputs are obvious response to the money supply and foreign exchange reserves, and the final output impact resulted from monetary policy and external economic factor is long-term. The impact on the money supply and foreign exchange reserves that comes from the price level only can effect in the short-term.PartⅤ: The analysis based on the amendments to the MF model of the open economic conditions improves the effectiveness of the main monetary policies. Monetary policy should also take into account the internal and external balance. Focusing on the forward-looking, reliability and coordination monetary policy , we can establish monetary policy framework ,which the monetary policy can achieve the comprehensive monitoring and controlling goal, as weakening the currency supply of intermediate goals, we can actively introduce market interest rate as an assisted intermediate goal. Develop effective tools of monetary policy, steadily push forward the marketing of interest rates, and realize coordination between the interest rate and exchange rate. At the same time we should pay more attention to coordination between the monetary policy and fiscal policy, industrial policy and other macroeconomic policies.