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The Analysis on the Validity of Chinese Monetary Policy in the Open Economy

Author: DuanYing
Tutor: ZhuangZiYin
School: Wuhan University
Course: Western Economics
Keywords: Open Economy Effectiveness of Monetary Policy Internal and External Equilibrium Conflict Policy Proposals
CLC: F822.0
Type: Master's thesis
Year: 2005
Downloads: 549
Quote: 1
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Abstract


The effectiveness of monetary policy is an important issue in both theory and practice. The degree of the validity of monetary policy is the basis of policy operation. Obviously, the validity of monetary policy in the close economy differs from that in the open economy. The openness of economy has great influence on monetary policy. China is gradually turning to open economy from close economy with thoroughgoing of reform and opening and the perfection of the system of socialist market economy. Hence, the environment that the monetary policy is based on has greatly changed.The development of open economy opens up new channels of connecting domestic currency and foreign currency. It also changed the way by which the monetary policy goes into effect. We need only consider the policy about domestic currency in the close economy, while we should harmonize the policy of exchange rate and monetary policy in the open economy. Since the factors that restrict the validity of monetary policy become more and more, the effect of monetary policy becomes ambiguous.This paper discusses the problem from the aspects of theoretic and empirical analysis. First, the paper introduces theories about the validity of monetary policy and the development of open economy macroeconomics. The second part builds a model of open economy based on the assumption of optimizing agents, which follows the basic frame of Obstfeld & Rogoff(1995,1996). The model shows that unexpected changes in the money supply will have real effects on output and consumption in open economy system when there is some degree of price and wage stickiness. Combining the certain economic and financial environment in China, the paper analyses the influence of open economy on different aspects of monetary policy such as ultimate goals, transmission mechanism, intermediate targets, instruments and the independence of monetary policy. And the paper also makes some empirical analysis. The influence of the openness of economy on monetary policy is tested. The results show that the effect of monetary policy on output in China decreases with the increasing openness of economy, and so does the effect on inflation rate. Finally, this paper puts forward the correspondingpolicy proposals. We should make a new choice on the intermediate targets, instruments, etc. of monetary policy, harmonize the policy of exchange rate and monetary policy, attach importance to security of financial system, and actively take part in the construction and reform of international monetary system.

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CLC: > Economic > Fiscal, monetary > Currency > China's currency > Principle of policy and its elaborate
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