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The Transition to Marked-Based Monetary Policy: What Can China Learn from the European Experience?

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  • Oxelheim, Lars

    ()
    (Research Institute of Industrial Economics)

  • Forssbæck , Jens

    ()
    (Lund University)

Abstract

We discuss the prospects for Chinese money market development and transition to market-based monetary policy operations based on a comparative historical analysis of the present Chinese situation and the development in 11 European countries from 1979 up to the launch of European Economic and Monetary Union (EMU). Central banks in the latter group typically had an incentive to encourage the formation of efficient benchmark segments in the domestic money markets for the conduct of open market operations as traditional quantity-oriented instruments became increasingly ineffective. China is displaying many of the same symptoms as the European countries in the 1970s and 1980s, including poor monetary transmission due to excess liquidity and conflicts of interest due to unclear priority among multiple policy goals. We conclude that the current Chinese multiple-target monetary policy is counter-productive to efforts to develop an efficient money market that can serve as arena for an effective market-based monetary policy.

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Bibliographic Info

Paper provided by Research Institute of Industrial Economics in its series Working Paper Series with number 696.

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Length: 60 pages
Date of creation: 06 Feb 2007
Date of revision:
Publication status: Published in Journal of Asian Economics, 2007, pages 257-283.
Handle: RePEc:hhs:iuiwop:0696

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Keywords: Monetary Policy Operations; Money Market; China; European Union; Deregulation;

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Cited by:
  1. Nguyen, Vu Hong Thai & Boateng, Agyenim, 2013. "The impact of excess reserves beyond precautionary levels on Bank Lending Channels in China," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 358-377.
  2. Xiaowen Jin, 2012. "An Empirical Study of Exchange Rate Pass-Through in China," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 59(2), pages 135-156, May.
  3. Carlos Montoro & Ramon Moreno, 2011. "The use of reserve requirements as a policy instrument in Latin America," BIS Quarterly Review, Bank for International Settlements, March.

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