Game Analysis of China Central Bank's Adjustment of Interest Rates

Abstract

There is an agreed-upon in modern economics that a monetary policy can be determined by either rules or discretion, where the latter tends to be more flexible but its repetitive change increases the uncertainty of the policy delay, which will possibly turn itself into one of the roots of economy instability [1] .While public expectations have had growing impact on the economy, how to lead public expectations and improve the effectiveness of its monetary policy are big challenges for the central bank. This paper addresses that if there is no reliable monetary policy when the central bank is in the game with the public, the prisoner’s dilemma will arise, but if the central bank can restrict its action space by making predictable policies, that will help to internalize future policies’ external effect, realize the dynamic consistency of the policy effect and achieve a better economic equilibrium.