The Optimal Monetary Policy Theory and the Simulation Analysis in China: Based on the New Keynesian Economics

Although there is considerable literature on optimal monetary policy for industrial countries, little research has been undertaken to investigate suitable monetary policy analysis framework for emerging countries that confront a different mix of shocks and have a fear of floating. This paper uses a New Keynesian model to simulate the quarterly data of 1996-2005 in China. Drawing on our econometric analysis, we argue that the model comes closer to the data of China, it is an ideal framework for Chinese optimal monetary policy analysis. The paper also suggests to make modifications of the typical policy rule to explain Chinese economy better.