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Autonomy and Effectiveness of Chinese Monetary Policy under the De Facto Fixed Exchange Rate System

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  • Huayu Sun
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    Abstract

    This paper uses monthly data to examine the autonomy and effectiveness of monetary policy in China under the de facto fixed exchange rate arrangement in place from 1998 to 2005. The results obtained from Granger causality tests in a vector autoregression framework indicate that: (i) China actually conducted independent monetary policy during the fixed exchange rate period; and (ii) market-oriented policy measures are impotent in influencing real output and prices. The framework of the investigation into the autonomy of monetary policy adapts to the Chinese economic condition that primary loan and deposit rates are set by the central bank. Based on the empirical results, the present paper provides alternative strategies to improve the effectiveness of monetary policy in China, including developing the financial system and solidifying microeconomic fundamentals instead of forcing the adaptation of a more flexible exchange rate regime. Copyright (c) 2009 The Author Journal compilation (c) 2009 Institute of World Economics and Politics, Chinese Academy of Social Sciences.

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    Bibliographic Info

    Article provided by Institute of World Economics and Politics, Chinese Academy of Social Sciences in its journal China & World Economy.

    Volume (Year): 17 (2009)
    Issue (Month): 3 ()
    Pages: 23-38

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    Handle: RePEc:bla:chinae:v:17:y:2009:i:3:p:23-38

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    Cited by:
    1. Vespignani, Joaquin L. & Ratti, Ronald A, 2013. "Chinese monetary expansion and the U.S. economy," MPRA Paper 48974, University Library of Munich, Germany.

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