Decreasing effectiveness of China’s monetary policy and expectation management

【Author】

GUO Yumei;CHEN Weize;CHEN Yanbin

【Institution】

School of Economics, Renmin University of China;Department of Economics, Boston University;School of Economics, Renmin University of China

【Abstract】

As the effectiveness of China’s monetary policy has decreased, it is difficult to stabilize macro-economy by using monetary policy. This paper builds up a dynamic stochastic general equilibrium model in the presence of expectation error shocks and expectation management policy, to study the performance of expectation management in response to economic fluctuations. The model shows that expectation management policy, by leading counter-cyclical inflation expectation to market, enables to reduce economic fluctuation significantly and make economy converge back to steady state faster. Welfare loss analysis implies that expectation management could cause a drop of welfare loss by nearly 40 percent in the context where monetary policy is not effective. Therefore, under current situation with declining effectiveness of monetary policy, China should pay substantial attention to expectation management.

【Keywords】

monetary policy;expectation management;economic cycle

References

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Springer Journals Database

Total: 31 articles

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