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  • Bernard Laurens
  • Rodolfo Maino
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    Abstract

    The People''s Bank of China (PBC) has made great strides in modernizing its monetary policy frameworks but their effectiveness will diminish as the sophistication of the economy increases. Empirical evidence supports maintaining a reference to money in China''s monetary strategy and enhancing the role of interest rates in its conduct. We advocate adoption of an eclectic strategy involving the monitoring of several indicators, and of a short-term interest rate as the operational target. The PBC should be granted discretion to change its policy rate, and there are no technical obstacles for such a move to occur in the near future.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/14.

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    Length: 51
    Date of creation: 01 Jan 2007
    Date of revision:
    Handle: RePEc:imf:imfwpa:07/14

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    Related research

    Keywords: Monetary policy instruments; Economic indicators; Interest rates; monetary policy; inflation; central bank; money market; money supply; foreign exchange; monetary aggregates; monetary aggregate; money demand; monetary fund; reserve requirements; monetary targeting; inflation targeting; price stability; money growth; monetary analysis; monetary policy implementation; aggregate demand; price level; inflation rate; money stock; monetary frameworks; monetary instruments; open market operations; monetary indicators; monetary base; independent monetary policy; monetary authorities; monetary policy framework; monetary policy strategy; transmission of monetary policy; monetary targets; reserve requirement; demand for money; intermediate monetary targets; monetary framework; monetary policy frameworks; inflation objective; low inflation; inflation target; monetary economics; lower rates of inflation; monetary program; monetary phenomenon; money balances; monetary target; inflationary pressures; macroeconomic stability; real money; rates of inflation; monetary growth; money market interest rates; foreign currency; liquidity management; monetary transmission; monetary policy decisions; monetary policy transmission mechanisms; annual inflation; monetary condition; inflation rates; real interest rates; inflation forecasts; real output; relative prices; inflation process; market for government securities; rediscount rate; inflation targeting framework; nominal interest rate; monetary transmission mechanism; inflationary expectations; expansionary monetary policy; monetary systems; monetary policy transmission mechanism; nominal variables; monetary shocks; monetary theory; money markets; rate of inflation; nominal rate of interest; monetary system; monetary policy instrument; national bank; government securities; domestic money market; discretionary monetary policy;

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    References

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    1. Bindseil, Ulrich, 2004. "The operational target of monetary policy and the rise and fall of reserve position doctrine," Working Paper Series 0372, European Central Bank.
    2. Arturo Estrella & Frederic S. Mishkin, 1996. "Is There a Role for Monetary Aggregates in the Conduct of Monetary Policy?," NBER Working Papers 5845, National Bureau of Economic Research, Inc.
    3. Richard Podpiera, 2006. "Progress in China'S Banking Sector Reform," IMF Working Papers 06/71, International Monetary Fund.
    4. Nicholas R. Lardy, 2005. "Exchange Rate and Monetary Policy in China," Cato Journal, Cato Journal, Cato Institute, vol. 25(1), pages 41-47, Winter.
    5. Bernard Laurens, 2005. "Monetary Policy Implementation at Different Stages of Market Development," IMF Occasional Papers 244, International Monetary Fund.
    6. Bruggeman, Annick & Camba-Méndez, Gonzalo & Fischer, Björn & Sousa, João, 2005. "Structural filters for monetary analysis: the inflationary movements of money in the euro area," Working Paper Series 0470, European Central Bank.
    7. Marc Quintyn & Bernard Laurens & Hassanali Mehran & Tom Nordman, 1996. "Monetary and Exchange System Reforms in China," IMF Occasional Papers 141, International Monetary Fund.
    8. Eswar Prasad, 2004. "China's Growth and Integration into the World Economy," IMF Occasional Papers 232, International Monetary Fund.
    9. Marvin Goodfriend & Eswar Prasad, 2006. "A Framework for Independent Monetary Policy in China," IMF Working Papers 06/111, International Monetary Fund.
    10. Eswar Prasad & Qing Wang & Thomas Rumbaugh, 2005. "Putting the Cart Before the Horse? Capital Account Liberalization and Exchange Rate Flexibility in China," IMF Policy Discussion Papers 05/1, International Monetary Fund.
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    Citations

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    Cited by:
    1. Koivu, Tuuli, 2008. "Has the Chinese economy become more sensitive to interest rates? Studying credit demand in China," BOFIT Discussion Papers 1/2008, Bank of Finland, Institute for Economies in Transition.
    2. Dong He & Honglin Wang, 2011. "Dual-Track Interest Rates and the Conduct of Monetary Policy in China," Working Papers 212011, Hong Kong Institute for Monetary Research.
    3. Anne laure Delatte & Julien Fouquau, 2010. "Smooth transition in China: New evidence in the cointegrating money demand relationship," Economics Bulletin, AccessEcon, vol. 30(1), pages 265-273.
    4. repec:ebl:ecbull:v:30:y:2010:i:1:p:265-273 is not listed on IDEAS
    5. Zhang, Wenlang, 2009. "China's monetary policy: Quantity versus price rules," Journal of Macroeconomics, Elsevier, vol. 31(3), pages 473-484, September.
    6. Shujie Yao & Dan Luo & Lixia Loh, . "On China’s Monetary Policy and Asset Prices," Discussion Papers 11/04, University of Nottingham, GEP.
    7. Liu, Li-gang & Zhang, Wenlang, 2010. "A New Keynesian model for analysing monetary policy in Mainland China," Journal of Asian Economics, Elsevier, vol. 21(6), pages 540-551, December.
    8. Koivu, Tuuli, 2009. "Has the Chinese economy become more sensitive to interest rates? Studying credit demand in China," China Economic Review, Elsevier, vol. 20(3), pages 455-470, September.
    9. Koivu, Tuuli, 2012. "Monetary policy, asset prices and consumption in China," Economic Systems, Elsevier, vol. 36(2), pages 307-325.
    10. Petreski, Marjan & Jovanovic, Branimir, 2012. "New Approach to Analyzing Monetary Policy in China," MPRA Paper 40497, University Library of Munich, Germany.
    11. Pang, Iris Ai Jao, 2010. "Comparisons of different monetary policies in China with yield curve information," MPRA Paper 32494, University Library of Munich, Germany.
    12. Dong He & Laurent L. Pauwels, 2008. "What Prompts the People's Bank of China to Change Its Monetary Policy Stance? Evidence from a Discrete Choice Model," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 16(6), pages 1-21.
    13. Nagayasu, Jun, 2009. "Regional Inflation in China," MPRA Paper 24722, University Library of Munich, Germany.
    14. Robert Lafrance, 2008. "China's Exchange Rate Policy: A Survey of the Literature," Discussion Papers 08-5, Bank of Canada.
    15. Bernard Laurens & Martin Sommer & Marco Arnone & Jean-François Segalotto, 2007. "Central Bank Autonomy," IMF Working Papers 07/88, International Monetary Fund.
    16. International Monetary Fund, 2009. "What Drives China's Interbank Market?," IMF Working Papers 09/189, International Monetary Fund.
    17. Dong He & Frank Leung & Philip Ng, 2007. "How Do Macroeconomic Developments in Mainland China Affect Hong Kong's Short-term Interest Rates?," Working Papers 0717, Hong Kong Monetary Authority.

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