Flexibility of China's Exchange Rate Regime and Independence of Monetary Policy——An Empirical Research Based on 1994—2011 Monthly Data

The paper empirically analyzes China's monetary independence with monthly data since 1994,and discusses the impacts of the 2005 exchange rate regime reform on the monetary policy independence.China's official and market interest rates are represented respectively by short-term deposit interest rate and inter-bank offered rate.According to the sensitivity of the two domestic interest rates to the world's interest rate,official interest rate is independent while market interest rate is not.After the exchange rate regime reform,both interest rates are more independent than ever.Since both are imperfect,the paper studies the sensitivity of monetary supply to foreign interest rate.The result shows that monetary policy is moderately independent,while much more independent after the 2005 exchange rate regime reform.By analyzing the relation between currency and foreign exchange reserve,it is found that the sterilization operation still plays an important role.