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Chinese Monetary Policy and the Dollar Peg

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  • Volz, Ulrich
  • Reade, J. James

Abstract

This paper investigates to what extent Chinese monetary policy is constrained by the dollar peg. To this end, we use a cointegration framework to examine whether Chinese interest rates are driven by the Fed’s policy. In a second step, we estimate a monetary model for China, in which we include also other monetary policy tools besides the central bank interest rate, namely reserve requirement ratios and open market operations. Our results suggest China has been relatively successful in isolating its monetary policy from the US policy and that the interest rate tool has not been effectively made use of. We therefore conclude that by employing capital controls and relying on other instruments than the interest rate China has been able to exert relatively autonomous monetary policy. --

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Bibliographic Info

Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis with number 48740.

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Date of creation: 2011
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Handle: RePEc:zbw:vfsc11:48740

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Web page: http://www.socialpolitik.org/
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Keywords: Chinese monetary policy; monetary independence; cointegration;

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  1. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, Econometric Society, vol. 55(2), pages 251-76, March.
  2. Reade, J. James & Volz, Ulrich, 2011. "Leader of the pack? German monetary dominance in Europe prior to EMU," Economic Modelling, Elsevier, Elsevier, vol. 28(1), pages 239-250.
  3. Ivan Roberts & Rod Tyers, 2003. "China's Exchange Rate Policy: The Case for Greater Flexibility," Asian Economic Journal, East Asian Economic Association, East Asian Economic Association, vol. 17(2), pages 155-184, 06.
  4. Hendry, David F. & Massmann, Michael, 2007. "Co-Breaking: Recent Advances and a Synopsis of the Literature," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 25, pages 33-51, January.
  5. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc.
  6. Mehrotra, Aaron & Koivu, Tuuli & Nuutilainen, Riikka, 2008. "McCallum rule and Chinese monetary policy," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 15/2008, Bank of Finland, Institute for Economies in Transition.
  7. Mehrotra, Aaron N., 2007. "Exchange and interest rate channels during a deflationary era--Evidence from Japan, Hong Kong and China," Journal of Comparative Economics, Elsevier, vol. 35(1), pages 188-210, March.
  8. Michael Geiger, 2008. "Instruments Of Monetary Policy In China And Their Effectiveness: 1994–2006," UNCTAD Discussion Papers, United Nations Conference on Trade and Development 187, United Nations Conference on Trade and Development.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Chinese inflation, monetary policy and the dollar peg
    by Guest Author in credit writedowns on 2011-02-18 13:20:00
  2. China und die G20
    by Ulrich Volz in Ökonomenstimme on 2011-03-08 12:00:00
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Cited by:
  1. Sunanda Sen, 2012. "Managing Global Financial Flows at the Cost of National Autonomy: China and India," Economics Working Paper Archive wp_714, Levy Economics Institute.
  2. J. James Reade & Ulrich Volz, 2011. "From the General to the Specific," Discussion Papers, Department of Economics, University of Birmingham 11-18, Department of Economics, University of Birmingham.
  3. Popper, Helen & Mandilaras, Alex & Bird, Graham, 2013. "Trilemma stability and international macroeconomic archetypes," European Economic Review, Elsevier, Elsevier, vol. 64(C), pages 181-193.
  4. Ito, Hiro & Volz, Ulrich, 2012. "The People’s Republic of China and Global Imbalances from a View of Sectorial Reforms," ADBI Working Papers, Asian Development Bank Institute 393, Asian Development Bank Institute.
  5. Bonatti, Luigi & Fracasso, Andrea, 2013. "Hoarding of international reserves in China: Mercantilism, domestic consumption and US monetary policy," Journal of International Money and Finance, Elsevier, Elsevier, vol. 32(C), pages 1044-1078.
  6. Körner, Finn Marten & Ehnts, Dirk H., 2013. "Chinese monetary policy – from theory to practice," MPRA Paper 44264, University Library of Munich, Germany.
  7. Kristina Spantig, 2012. "International monetary policy spillovers in an asymmetric world monetary system - The United States and China," Global Financial Markets Working Paper Series 2012-33, Friedrich-Schiller-University Jena.

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