Inflation Expectation Management and Monetary Policy —Analysis Based on the “New Consensus” Macroeconomic Model
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| Title | Inflation Expectation Management and Monetary Policy —Analysis Based on the “New Consensus” Macroeconomic Model
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| Author | Yao Yudong and Tan Haiming |
| Organization | Monetary Policy Department II, the People’s Bank of China |
| Email | yaoyudong@yahoo.com；sea_tan@yahoo.com |
| Key Words | Inflation expectation; Monetary Policy; “New Consensus” Macroeconomic Model |
| Abstract | This paper develops a macroeconomic model of the Chinese economy under the “New Consensus” macroeconomic framework, based on inflation expectation and the issuing rate of central bank bills, for the first time in China. The model is estimated and analyzed with a multi-function system. The results are as follows: (1) the monetary policy in China should be focused on the management of inflation expectation, and directly targets at inflation and output gap, with no intermediate target needed; (2) Inflation expectation has a big impact on the Chinese real economy, while inflation itself has a much smaller influence on the real economy; (3) due to the strong impetus nature of the inflation expectation, unusual monetary tightening is needed to bring inflation expectation under full control, which will lead to the fluctuation of the real economy; (4)the time lags of inflation expectation shock and monetary policy shock are quite close, which means monetary policy should react promptly to inflation expectation shock to exert its full effect; (5)inflation expectation is a major factor influencing inflation in China currently; (6)In the current transitory stage of quantity-oriented monetary policy to price-oriented monetary policy, the issuing interest rate of central bank bills can act as an key indicator of the monetary policy measures. |
| Serial Number | WP85 |
| Time | 2011-07-20 |
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