InflationTargetingunderfixedexchangeregime.pdf

Inflation Targeting under fixed exchange regime: How can Chinese central bank do it? July 2004 ? Meixing DAI ( ) Abstract: Chinese central bank is recently reported to abandon without announcement the quantity of money supply as its intermediary goal and to adopt the framework of inflation targeting. Generally, the later is associated in the inflation targeting literature with flexible exchange rate regime. Inflation targeting under fixed exchange rate regime is a new challenge in theory as well as in practice. We show in this paper, using a dynamic setting, that under fixed exchange rate regime and with the help of some macro-economic management measures, Chinese central bank can, even the task is hard, mimic inflation targeting under flexible exchange rate regime. JEL Classification : E52, E58, F41 Keywords: inflation targeting, fixed exchange rate regime, stability, optimal interest rate rule, Chinese economy, China, macroeconomic management measures. (*) Meixing DAI, Associate Professor, Université Louis Pasteur (Strasbourg 1), BETA-Theme, 61, Avenue de la Forêt Noire – 67085 Strasbourg Cedex, France, Tel : (33) 03 90 24 20 78; Fax : (33) 03 90 24 20 71, e-mail : dai@cournot.u-strasbg.fr . 1. Introduction For a long time, one of important debates on monetary policy is the choice of intermediate goal of monetary policy between interest rate and money supply. The attention is now turning to inflation targeting, a new framework that a growing number of industrial countries (including Canada, the United Kingdom, Sweden, Finland and Australia) ha