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External shocks and China’s monetary policy

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  • Zheng Liu
  • Mark M. Spiegel

Abstract

China prohibits its private sector from freely trading foreign assets and tightly manages currency exchange rates. In the wake of the recent global financial crisis, interest rates on China’s foreign assets fell sharply, while yields on Chinese domestic assets remained relatively high, posing a challenge for China’s monetary policy. Opening the capital account would improve China’s capacity to weather external shocks, such as sudden declines in foreign interest rates. However, allowing the exchange rate to float without removing capital controls is less effective.

Suggested Citation

  • Zheng Liu & Mark M. Spiegel, 2012. "External shocks and China’s monetary policy," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue dec3.
  • Handle: RePEc:fip:fedfel:y:2012:i:dec3:n:2012-36
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    Keywords

    China;

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