The Inflation Target Of Monetary Policy Should Peg To CPI Or PPI?

China’s monetary policy reform continuously perfect,and gradually establish a relatively stable sound monetary policy regulation system.The final goal of monetary policy originally was just economic growth,while now the target is develop into stable inflation,promoting economic growth.Inflation index has become an important issues that central banks focus on.This paper establish a small open economy based on Calvo pricing dynamic stochastic general equilibrium(DSGE).We simulate under technology shock,output shock,output gap shock on the CPI inflation rate and PPI inflation index,the impulse response of macroeconomic variables such as output,output gap and the rate of inflation and interest rates.Under the shock of technology,the impact on PPI inflation index is more obvious than the CPI inflation index,but changes in the same direction;Under the shock of output,output gap and output of the former is decline,while the latter is rise.The rate of inflation and interest rate changes the same,but PPI inflation index changes larger;The impact of interest rates on inflation index is basically identical.We calculate the second order approximation of the utility function of social welfare loss,and found the social welfare loss of CPI inflation index is smaller.Therefore,when the central bank make monetary policy,pegging on the CPI inflation is more reasonable.The CPI in China is high and some times even higher than the nominal interest rate.The people’s bank of China should raise interest rates.Making private enterprises bigger and stronger,so as to greatly improve the efficiency of China’s economy,and to stimulate China’s economic long-term sustainable growth.