The Research On Chinese Monetary Policy Orientation In An Open Economy

As one of the important monetary policy rules,Taylor rule has shown good performance in describing the operation of central bank's monetary policy,and has been concerned and adopted by academia and central bank.However,based on the changes in the macroeconomic environment and the monetary policy preference of the central bank,the traditional Taylor rule has not been applied to portray the monetary policy operation of the central bank.This paper intends to expand the traditional Taylor rules and study the monetary policy orientation of the Central Bank of China.This paper extends the traditional Taylor rule from two aspects:from the closed economy to the open economy,from the linear form to the time-varying parameter form.By establishing the new Keynes model under the open economy,under the constraint of the quadratic loss function of the central bank,this paper deduces the Taylor rule containing exchange rate factors,and further change it into time-varying parameters form.Because there may be endogenous problems in key variables(output gap,inflation rate and exchange rate gap)in the model,we use Heckman-type two-step maximum likelihood estimation combined with Kalman filtering to estimate the Taylor rule with time-varying parameters of GARCH distribution.The empirical results show that:(1)Chinese central bank's monetary policy has closely pegged to inflation,output gap and exchange rate.When inflation increases and the output gap is in a positive gap,the central bank tends to raise interest rates in order to return inflation and actual output to a balanced level.The central bank's preference for inflation is increasing,while the preference for the governance output gap is declining.(2)The strength of the peg rate of the Central Bank of China is obviously less than the intensity of pegging inflation and the output gap.Since the second exchange rate reform,the interest rate has been negatively correlated with the change of the exchange rate gap.(3)The monetary policy of the Central Bank of China has a relatively stable and strong interest-rate-smoothing feature;the equilibrium interest rate fluctuation is relatively large,but the overall trend is declining,which may be caused by the reduction of the marginal return on capital in the investment driven economy.