A framework for independent monetary policy in China, Issues 2006-2111
International Monetary Fund, Research Dept., 2006 - Business & Economics - 50 pages
As China's economy becomes more market based and continues its rapid integration into the global economy, having an independent and effective monetary policy regime oriented to domestic objectives will become increasingly important. Employing modern principles of monetary policy in light of the current state of China's financial institutions, we motivate and present a package of proposals to guide the operation of a new monetary policy regime. Specifically, we recommend an explicit low long-run inflation objective, operational independence for the People's Bank of China (PBC) with formal strategic guidance from the government, and a minimal set of financial sector reforms (to make the Chinese banking system robust against interest rate fluctuations). We argue that anchoring monetary policy with an explicit inflation objective would be the most reliable way for the PBC to tie down inflation expectations, and thereby enable monetary policy to make the best contribution to macroeconomic and financial stability, as well as economic growth. The management and monitoring of money (and credit) growth by the PBC would continue to play a useful role in the stabilization of inflation, but a money target would not constitute a good stand-alone nominal anchor.
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Introduction and Overview
Principles of Monetary Policy Geared toward Targeting Inflation
Monetary and Banking Institutions in China
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A Framework for Independent Monetary Policy in China (EPub)
Marvin Goodfriend,Mr. Eswar Prasad
Limited preview - 2006
aggregate bank reserves aggregate demand anchor for monetary assets balance sheet bank lending base rate billion bonds capital controls central bank bills Chinese banking system commercial banks control of bank core inflation credibility for low deflation directed lending domestic effectively excess reserve demand exchange rate regime explicit financial system financially robust firms fiscal policy fixed exchange rate flexible exchange rate foreign exchange foreign exchange market independent monetary policy inflation scare inflation targeting inflows instrument independence interbank interest rates interbank market interbank rate interest rate fluctuations lending rates loans long-run inflation objective low inflation objective macroeconomic manage aggregate monetary base monetary policy actions monetary policy geared money growth target nominal anchor nonviable SOEs NPLs open market operations PBC bills PBC's percent policy instrument potential productivity growth profit-maximizing markups reforms relative renminbi reserve requirements robust against interest SCBs SEFC short-term interest rates stabilize inflation strategic guidance U.S. dollar