Dynamic Inflation Target and China’s Economic Fluctuation
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| Title | Dynamic Inflation Target and China’s Economic Fluctuation
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| Author | Jian Zhihong and Li Shuang |
| Organization | School of Economics, Huazhong University of Science and Technology |
| Email | jian2288@hotmail.com,lishuang2324@163.com |
| Key Words | Dynamic Inflation Target; Economic Fluctuation; Money Supply Rule |
| Abstract | This paper constructs a dynamic stochastic general equilibrium (DSGE) model to analyze China’s monetary policy in a New Keynesian framework. A dynamic inflation target is introduced to investigate how consumer’s demand shock, productivity shock, money supply shock and inflation target shock influence China’s economic fluctuations. The empirical evidence supports the assumption that China’s monetary policy has a dynamic endogenous inflation target which could stabilize inflation. The inflation target responds positively to the productivity shock and negatively to the consumer’s demand shock. It shows that money supply shock lead to a transitory increase in output, whereas productivity shock permanently raises the level of output. In addition, the consumer’s demand shock has permanent effects on consumption, money supply and inflation but temporary effects on other endogenous variables. |
| Serial Number | WP56 |
| Time | 2011-02-14 |
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