Comparative Study Of Different Taylor’s Rules Empirical Test In China

Since the1990s, with the development of financial markets and financial innovation,part of the Western developed countries change the regulation of monetary policy, shiftfrom quantity model to price model, such as the interest rate. At the same time, in order tosolve the problem of dynamic inconsistency, academics and monetary authorities graduallygive up the idea of "discretionary" and advocate the implementation of the rule-basedmonetary policy. Under this context, the Taylor’s rule has become the main principle of thecentral bank’s monetary policy in some countries. People’s Bank of China formulation andimplementation monetary policy has obvious "discretionary" characteristic, there are someproblems as low independence, lagging regulation and so on. With the development andimprovement of the economic and financial system, the policy effect of discretionary isweaking. Therefore, it is inevitable to make monetary policy as the rule type in future. Inaddition, with economic globalization and the rapid development of capital markets,exchange rates and asset prices have deep impact on macro-economic and socialdevelopment in many countries and receive more attention of many countries’ central bank.So, it has important theoretical and practical significance to consider the exchange rate andasset price in building and selecting the specific form of Chinese monetary policy rule.This paper reviews the theory of monetary policy rules and combines with the actualsituation of monetary policy operations in China, supposes that monetary policy of Chinashould conform to Taylor’s rules. In order to test the impact of exchange rates and assetprices on monetary policy, both of them are added into the Taylor’s rule model. TheTaylor’s rules designed in this paper include interest rate, exchange rate and asset price.And we select the Chinese actual data from the first quarter of1996to the fourth quarter of2011as sample. Firstly, we use Hodrick-Prescott and Census X12seasonal adjustmentmethod for data process. Secondly, we use Unit Root Tests, Johansen-Juseliuscointegration test and GMM estimation to explore the influence of the inflation rate, outputgap, exchange rates and volatility of stock market price to interest rates. Finally, we makedynamic simulation and comparative analysis with the regression results, determine thesuitable form of Taylor’s rules in China. Based on this, we provide guidances for theformulation of monetary policy and intermediate target in China.Empirical research indicates that regulation of interest rates responds not only to the output gap and inflation rate, but also to the exchange rate and asset prices. The operationof monetary policy in China is under some rules; Taylor’s rules which includes theexchange rate and interest rate smoothing can describe trends of interest rate in China verywell, and it also can be used as a reference standard for monetary policy in China. Theinterest rate reaction coefficient on inflation, output gap and exchange rate gap is large, butthe reaction coefficient on asset price volatility is small, it indicates that The People’s Bankof China does not pay too much attention on asset price volatility. The monetary policy ofChina is not stable, so the adjustment for interest rates to inflation is adaptive and has astrong smoothing characteristic. Overall, with the gradual opening up of the economy anddeepening of financial system reform, People’s Bank of China needs to strengthenmarket-oriented reform of interest rates and exchange rates, raise the independence,accountability and transparency of monetary policy, so it could improve the regulatorycapacity of monetary policy and maintain long-term stable economic growth.