Understanding Monetary Policy: A New Keynesian View
This paper attempts to elaborate China's monetary policy in a new Keynesian monetary economic model. The model and estimated result show that, at present at least, the monetary policy which set monetary supply as intermediate target is still suitable. Instead, the interest rate such as Taylor rules is not good instrument rule. The model and its result also show that there is a great nominal rigidity in China's economy from which supply shock is not main factors resulting in inflation movement. The movements of inflation and economic outputs is mainly due to changes of household's utility and real money balances. The nominal rigidity has an important role in understanding the monetary policy that responds to changes of demands.