The Study On The Applicability Of Taylor Rule In China In The Open Economics

Since the last90s, with the rapid economic development and enhanced openness, thereform of the financial system is improved constantly and the financial environment isbetter. From the process of the monetary policy rule all around the world, interest rate isplaying the role of intermediate target, which is the trend, and in China the practices ofmonetary will be with international standard and be more normal. So the proposition thatChina should take the practices of monetary policy according to Taylor Rule is put forwardin view of the limited effect of Chinese policy practices and the advantages of Taylor Rule.In order to study the applicability of Taylor Rule in China, the introduction of TaylorRule and its current situation on domestic and foreign study are reviewed and summed upfirstly, and Taylor Rule is deduced with Keynesian framework which is the theory stone ofthis paper. And then take suitable factors of Taylor Rule and the process of interest ratemarket-oriented and the reform of exchange rate into account, the question that interest rateis whether suitable to be the intermediate target of monetary policy is answered to supplythe next empirical research via the explanation of the controllability, testability andcorrelation of interest rate. And also based on the above explanation and the basic model offorward-looking Taylor Rule, interest rate-smoothing, money supply, asset price andexchange rate are pull into Taylor Rule one by one and are tested empirically. The resultsshow that interest rate-smoothing makes the effect of estimation equation better, whichimplies that the central bank trends to take the smoothing monetary policies; money supplyand asset price are not notable in statistical significance, which shows that the central bankdoes not add these factors into the Taylor Rule as the direct contributing factor; theexchange rate is notable, and the corresponding expanded rule is stable though thecoefficient is little, which shows that the central bank indeed considers the exchange ratewhen adjusting the interest rate, but gives a small weight of exchange rate to interest rate.Finally, according to the above research, some suggestions are put forward from theaspects of the improvement of monetary control system, the construction of central bankregime, the marketization of interest rate and the reform of RMB exchange rate system.