Abstract: Considering the decision-making behavior of microcosmic bodies and the social welfare effects of monetary policy and taking China’s quarterly data from 1998 to 2012 as the samples, this paper adopts the dynamic stochastic general equilibrium model (DSGE), which can systematicly cover production, consumption, labor and social welfare effects, to conduct an empirical study of the target rate selection of the central bank’s monetary policy after the completion of interest rate liberalization in China. The results show that when the central bank employs the three target rates of Shibor007, R007and IBO007 respectively to exercise its control, the effect path of monetary policy on the real economy is basically the same. In terms of economic sensitivity, R007 is superior to the other two. In terms of welfare losses, when using R007 as a target rate of monetary policy, the monetary policy can make the minimal volatility of output, consumption and labor, and the minimal loss of welfare. On the whole, R007 is a better choice of target rate for the central bank’s monetary policy. China should improve the inter-bank pledge-style repo rate system, and cultivate R007 as the target rate of monetary policy step by step.

Key words: social welfare; target interest rate; dynamic stochastic general equilibrium model