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A Suitability Analysis for Taylor Rule in China

Author: WangYiZuo
Tutor: XingTianCai
School: Dongbei University of Finance
Course: Finance
Keywords: Monetary Policy Taylor Rule Johansen-Co-integration Test Output Gap Inflation Gap
CLC: F224
Type: Master's thesis
Year: 2011
Downloads: 66
Quote: 0
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Abstract


With the development of financial innovation and liberalization spread quickly, the central bank’s ability to control of the money supply became more and more weak, resulting use of it has been questioned, and then many western countries turned to chose interest rates as intermediate target for monetary policy. In recent years, from the situation of our country’s monetary policy, there are also many problems in the controllable, measurable and the correlation of final goal, monetary authorities should pay more attention to the interest rates in economic regulation. Through Taylor’s research of monetary policy in the United States, Canada and other countries, it showed that a long-term stable correlation lie in the three variables, which are the real interest that eliminate the rate of inflationary, prices of commodities and economic growth, Taylor draw the famous conclusion "Taylor Rule" through a simple policy rules imitation.In recent years, Taylor Rule has been widely used in the macro economic model of experiment and research, many western countries’monetary authorities guidance based on it to conduct monetary policy, national scholars have developed intense discussion of this rule. If Taylor rule contribute to China’s monetary policy operation, then we have a one more reliable reference goal. I hope this thesis can learn from successful experience of western countries’monetary policy rules on China.Firstly, the thesis briefly reviews further research of domestic and foreign scholars, lead to background of Taylor Rule form optimal interest rate rule, introduce the general, classic and expansion forms of it. Of course the formula has been constantly revised and improved.Secondly, is this thesis’s empirical analysis, we illustrate the method of selecting indicators. It points out the process of selection index and their advantages and disadvantages. After that, we estimate the equation of Taylor Rule in China. The results show that the long- run relationship among the five variables tested, so the traditional Taylor Rule can be used in the description of Chinese inter-bank borrowing rate’s trend. We consider the expected inflation rate and refine the model.Thirdly, according to the analysis and results of the Johansen Co-integration Test, we can see that here are still a lot of problems when we use Taylor Rule. The most important one is that we must speed up in the interest rate marketization. We should also deepen the reformation of the foreign exchange rate.Finally,it do the right of the narrative and summarized of this thesis.

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CLC: > Economic > Economic planning and management > Economic calculation, economic and mathematical methods > Economic and mathematical methods
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