Chinese monetary policy – from theory to practice
AbstractChinese monetary policy constitutes a marked example of a clash between theory and practice. In theory, a fixed exchange rate regime with capital mobility turns the money supply into an endogenous variable while expansionary pressure can be alleviated by the central bank by foreign currency transactions. For China, this standard view is contended by the 'compensation thesis' as proposed by Lavoie and Wang (2012) according to which the central bank maintains discretion over money supply by using alternative balance sheet instruments. In this paper we show that the People's Bank of China's (PBoC) activities can be better characterized by the 'compensation thesis' view of alternative money supply operations. In addition, we can thus characterize the PBoC's policy stance as being directed at targeting inflation and exchange rate stability via a five-phase policy mix using sterilization bonds and reserve requirements according to macroeconomic conditions. After downgrading the loans-to-deposits ratio of 75% to the status of an indicator and given the rise in lending despite a high reserve ratio, the quantity-driven approach to monetary policy of the PBoC faces an uncertain future.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 44264.
Date of creation: 07 Feb 2013
Date of revision:
Chineses monetary policy; Nominal exchange rate; Money supply; Mundell-Fleming; Compensation thesis; Modern Money Theory; Sterilization; Loans-to-deposit ratio; Reserve requirement ratio; Credit and money suppply growth;
Find related papers by JEL classification:
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
- F31 - International Economics - - International Finance - - - Foreign Exchange
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-02-16 (All new papers)
- NEP-CBA-2013-02-16 (Central Banking)
- NEP-MAC-2013-02-16 (Macroeconomics)
- NEP-MON-2013-02-16 (Monetary Economics)
- NEP-TRA-2013-02-16 (Transition Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Dong He & Laurent Pauwels, 2008. "What Prompts the People's Bank of China to Change its Monetary Policy Stance? Evidence from a Discrete Choice Model," Working Papers 0806, Hong Kong Monetary Authority.
- Reade, J. James & Volz, Ulrich, 2010.
"Chinese monetary policy and the dollar peg,"
2010/35, Free University Berlin, School of Business & Economics.
- Volz, Ulrich & Reade, J. James, 2011. "Chinese Monetary Policy and the Dollar Peg," Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48740, Verein für Socialpolitik / German Economic Association.
- Korhonen, Iikka & Ritola, Maria, 2009. "Renminbi misaligned - Results from meta-regressions," BOFIT Discussion Papers 13/2009, Bank of Finland, Institute for Economies in Transition.
- Buiter, Willem H, 2008. "Can Central Banks Go Broke?," CEPR Discussion Papers 6827, C.E.P.R. Discussion Papers.
- Marc Lavoie & Peng Wang, 2012. "The ‘compensation’ thesis, as exemplified by the case of the Chinese central bank," International Review of Applied Economics, Taylor & Francis Journals, vol. 26(3), pages 287-301, April.
Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- China Credit Crunch its the central bank, stupid!
by Dirk in econoblog101 on 2013-06-20 13:55:49
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