The Impacts of Interest Rate Liberalization on the Effects of Price-Based and Quantity-Based Monetary Policies

This paper builds a dynamic, stochastic and general equilibrium framework, and from the perspective of increase in equilibrium interest rate, analyzes the impacts of interest rate liberalization on the effects of the price-based and quantity-based monetary policies. By the analyses of impulse response, parameter sensitivity and social welfare loss,it is found that:(1) the increase in equilibrium interest rate weakens the quantity-based regulation ability of macro-economy, and reduces the fluctuation in the price-based regulation of output, but enhances the ability to regulate inflation.Currently, the effects of quantity-based regulation are better than those of the price-based.(2) The analysis of parameter sensitivity shows that price-based regulation is more stable.(3) Under the conditions of the two kinds of monetary policy,the increase in equilibrium interest rate almost does not impact inhabitant's social welfare. Relatively, the price-based regulation results in less welfare loss. With the acceleration of interest rate liberalization, the central bank needs to coordinate the two kinds of monetary policy and promote the transformation from the price-based to the quantity-based.