Empirical Analysis on Monetary Policy Efficiency in China

As an important indicator to test the effectiveness of monetary policy, monetary policy efficiency has long been discussed. In this paper, we adopt the stochastic frontier analysis (SFA) based on translog function to measure the Chinese monetary policy efficiency from 1998 to 2011. Our empirical results indicate that economic growth and price stability have the same weights in the Chinese monetary policy function. Money aggregate (M2) has a larger impact on the monetary policy targets than interest rate does. Generally speaking, Chinese monetary policy efficiency is not so high and needs to be improved. To enhance monetary policy efficiency, China should reform its monetary policy framework by introducing the flexible targets into the monetary policy framework, further the interest rate reform and continue the reform on the Renminbi exchange rate regime.