An Empirical Study On The Effect Of Monetary Policy On Inflation And Economic Growth In China

Since the inauguration of the Reform and Open-up, the economy of China maintains rapid growth. The average annual growth rate of the economy has maintained above 9.6% continuously for as long as 30 years. Although in recent years economic growth has declined, average annual GDP growth rate of our country still reached 6.9% in 2015. But at the same time, prices fluctuate frequently in our country. Therefore, preventing the inflation and maintaining the stability of economic growth become the top priority of the current national macro-control. The proper monetary policy is essential to control macroeconomic effectively and maintain financial stability. Among all medium objectives of monetary policy, the monetary supply, interest rates, exchange rates have been the most major variables. Our country had been officially recognized the monetary supply as monetary policy intermediate target in 1996.With the advancement of China’s market-oriented reform of interest rates, the Central Bank began to bring interest rate into the scope of monetary policy. At the same time, with the improvement of the exchange rate mechanism, the influence of exchange rate regime in macroeconomic gradually deepens, so the exchange rate has also become a medium objective of monetary policy.Therefore, choosing the monetary supply, interest rates, exchange rates as medium objectives, examining the dynamic regulation effect of monetary policy to inflation and economic growth is necessary. The study has extremely important practical significance to control inflation effectively and keep China’s economic construction successfully.In view of this situation, this paper chooses monetary growth rates, interest rates, exchange rate as medium objectives of monetary policy, as well as the inflation rate and economic growth rate two macroeconomic variables as final objectives of monetary policy, selects the time-varying parameter VAR model with stochastic volatility as empirical model, using impulse response analysis toexplore the time-varying features of the regulating effect of monetary policy.Empirical results reveal that, when regarding the growth rate of the currency, interest rates and exchange rate as medium objectives of monetary policy, the regulating effect of monetary policy on inflation and economic growth is time-varying. For different economic situation and period, the effect is different.The effect of interest rates on inflation in short-term is greater than the effect in long run. Positive impact of interest rates promotes economic growth in the short term, but in the long run, restrains economic growth. RMB appreciation has inhibitory effect on inflation, and exchange rates have greater effect on inflation in short-term. RMB appreciation will promote economic growth in the long run, and in recent years, with the continuous improvement of the exchange rate regime, the effect of exchange rates regulation on economic growth increases gradually. The effect of monetary on inflation is almost consistent for short and long term. The increase of monetary supply may cause inflation and promote economic growth. Before February, 2010, the increase of monetary supply will promote economic growth in the short term, but has non-persistent. After 2010, the increase of monetary supply can effectively promote economic growth both in short term and long term.In recent years, with the interest rate marketization and exchange rate marketization improve continuously, the interest rate and exchange rate regulation on inflation and economic growth increase gradually. At the same time, the monetary supply regulation on economic growth is gradually maturing over time.