Abstract

Since China began to choose the interest rate as a monetary policy tool , the People's Bank of China agreed to adopt the view of Western scholars that  is useful for it to apply the "random choice" rule and the “single rule” monetary policy rules synthetically.Nevertheless the implementation of against economic cycle "random choice" rules as its monetary policy rule has not yielded satisfactory results with the development of China's market economy. For example, this bank has just raised interest rates in 2007 for preventing inflation, then it has to reduce the rate in 2008 to preventing the economic slowdown. Comparing with the operation followed a single rule, this monetary policy conduction is hard to smooth the economic fluctuation and promote a good market in expect. On the contrary, a single rule can be a small and continuous adjustment, its effect is like peace.

Chinese scholars have done a lot of empirical analysis, focusing on whether single currency rules such as the Taylor rule should be adopted for monetary authorities of China. They have gotten some useful conclusion. Due to the problem of data and methods, in contrast, conclusions of these studies are often contradictory and hardly to find a convincing study. Because Chinese scholars do not take full account of the macroeconomic variables, it either only concerned with internal economic variables, or just added individual external economic variables.

So this paper attempt, by using Chinese data, to carry out empirical analysis for Taylor rules in China with included a wider range of macroeconomic variables. Including the factors of time and expectation, this paper starts from the point of view of internal and external balance and establishes forward-looking Taylor rule equation by adding the real effective exchange rate as an independent variable into the original equation. After OLS, GMM estimating by using Chinese data from 1994~2007,we find that real effective exchange rate has limited affection to Chinese interest rate setting and changing. The result of regression shows that Taylor Rule is a good tool to judge whether it is tight or loose for Chinese monetary policy.

Key Words: Taylor Rule; China’s Monetary Policy; Empirical Analysis.

Contents

1.Introduction.................................................... ............. .........................3

• The background of the research...... ..................... ................. .......3
• The purpose of research........................................ .........................4

2. Literature summarize................................................... ........................5

  2.1 Taylor rule and its extending.................................. ....................... 5

    2.2 Chinese literature summarize.............. ........................................ ..6

       2.2.1 The evolution of Chinese monetary policy goals........ .... ......

2.2.2Literature summarize on empirical analysis about Taylor rule in  China............................................ .................................. ....... ...........8

3. model establishment........................................................ .. ................10

    3.1 Model enactment.................................................... ... . ..............11

        3.2 Variables illustration....................................... ...... ..... ... ..........11

4. The test of Taylor rule in china............................. ............ . ................13

    4.1 GMM estimation............................................ ........... .................13

    4.2 OLS estimation without exchange rate.................... ............. ....14

    5. Conclusion.................... ............  ...... ............. .... .................. .. .. ....17

Reference.................... ............. ...... .. ............ ............. ........... .... ... . .18

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