| China is adjusting its exchange rate system to become more flexible now.But according to the international experience, the floating exchange ratesystem is very easy to lead serious inflation problem. These years, manycountries found that the inflation-targeting (IT) framework is a good choice tosolve the inflation problem under floating exchange rate system. To avoid the"time-inconsistent" problem, monetary policy rule is necessary for the ITsystem. So in this aspect, we could say that for those emerging marketeconomies that do not choose a policy of "permanently" fixing the exchangerate, the sound monetary policy is one based on the trinity of a flexibleexchange rate, an inflation target, and a monetary policy rule.In this paper, we first introduce the IT system, including the academicanalysis. Then we focus on the environment difference in China to see thatonce we adopt the IT system, what we should pay attention to.We think there are 3 differences: (1) central banks' low credibility (2) theless development of financial system (3) large external shocks (high volatilityof output, exchange rate and interest rate)I use a new-Keynesian model to show that the low credibility of centralbanks will affect the inflation targeting system. And I also do simulation to showthe effect of the households' credibility-enhance channel. The lessdevelopment of financial institution can be considered in two ways: first thehouseholds will not fully trust the central bank;second, the monetary transmitchannels became different. The external shocks are very important. We usethe volatility of exchange rate to measure the external shocks. But because wedon't let the exchange rate to float freely, so we can use the spread overTreasuries of the foreign currency denominated debt of the country as anotherindicator of external shocks.At last, we could use the inflation targeting design, transparency and"adjusted" targets to deal with the external shocks... |
