Abstract: In this paper, we consider the internal structure of the total demand curve, the new Cairns Phillips curve, the exchange rate interest rate transmission and the Taylor rule, and use the time-varying parameter vector autoregressive ( TVP-SV-VAR) model, to capture the time-varying characteristics of China's monetary policy response to output, inflation and exchange rate, and examine the difference between the actual exchange rate and the effective exchange rate into the Taylor rule on the effectiveness of monetary policy. The results show that the introduction of RMB real effective exchange rate into the Taylor rule makes the monetary policy stare at the inflation target parameters and the output gap notation significantly improved compared to the Taylor rule without introducing the exchange rate factor or the RMB real exchange rate. The RMB real effective exchange rate into the Taylor rule is more in line with the reality of China's monetary policy rules.

Key Words: Open Economic Conditions; Time-varying Parameters; Taylor Rule; Monetary Policy; TVP-SV-VAR Model