The Evaluation On Choice And Effectiveness Of China’s Monetary Policy Intermediate Objective

Monetary policy often has the time lag. If the central bank wants to evaluate the effectiveness of monetary policy, they must choice an intermediate objective, which can be quantified in a short time and easy to manipulate. The intermediate objective should have a high correlation with the ultimate goal of monetary policy so that the central bank can achieve economic growth, stabilize the price, make full employment and balance the international payments through monitoring this index. At present, whether the money supply can be regarded as the intermediate target of monetary policy, whether can adapt to China’s economy, whether can reach the goal of control by central bank, the academia of China still has many arguments on this problem. Thus, the study on intermediate Objective of monetary policy options and the effects of monetary policy has a very important practical significance for China’s economy.The paper analyzes intermediate objective of monetary policy combined with the China’s economy and the ultimate goal of monetary policy, introduces the intermediate objective selection theory put forward by Poole and Factor-Augmented VAR model. Then use the Analysis of Poole perspective from output and Factor-Augmented VAR Model perspective from effectiveness of monetary policy to choose intermediate objective which adapt to our country.Firstly, the paper use the classical intermediate objective selection theory put forward by Poole to analyze quarterly data of 1996 to 2014. Then draw a conclusion that China’s current economic impact is still derived from the product market and inspect this conclusion by co-integration test. The central bank should continue to use money supply as the intermediate objective of monetary policy, rather than interest rate.Secondly, since the classical theory has its own economic significance and limitations, the number of macroeconomic variables cannot be included in all aspects during the selection of intermediate objective. Therefore, a more advanced model called Factor-Augmented VAR can be adopted to hold more information and make the conclusion more reliable. Based on the effectiveness evaluation index system about China’s intermediate objective of monetary policy, the paper utilize more than 70 economic variables related to economic development, price level and the stock market conditions from January 2003 to December 2014 to research on the choice of intermediate objective. For the currently situation of China, the money supply is still regard as the appropriate intermediate objective of monetary policy. But in some area of the economy, interest rate and some other methods maybe better in control. So the central bank may consider using interest rate as the monitoring index. The paper evaluates the effectiveness of monetary policy and comes to a conclusion that monetary policy has a positive effect on China’s economy.