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Inflation-targeting under a Managed Exchange Rate: the Case of the Chinese Central Bank

  • Meixing Dai

In 2004, the People's Bank of China (PBC) is reported to have abandoned the quantity of money as its intermediate goal and to adopt some elements of the apparatus of inflation targeting, without giving up the managed exchange rate regime for the renminbi (RMB), the Chinese currency. We show in this paper, using a dynamic setting, that partially implementing the apparatus of inflation targeting by the PBC to improve the performance of monetary policy encounters various difficulties from out-of-equilibrium dynamics to macro-economic and financial instability. In this context, some macro-economic measures can be helpful for reducing disequilibrium. Further development of internal monetary and financial markets and assigning balanced weights by the PBC to inflation and output targets are necessary conditions for the regime to be stable.

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Article provided by Taylor & Francis Journals in its journal Journal of Chinese Economic and Business Studies.

Volume (Year): 4 (2006)
Issue (Month): 3 ()
Pages: 199-219

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Handle: RePEc:taf:jocebs:v:4:y:2006:i:3:p:199-219
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  1. Dixon, Huw David, 1998. "Monetary Policy and Credit in China: A Theoretical Analysis," CEPR Discussion Papers 1906, C.E.P.R. Discussion Papers.
  2. Øistein RØisland & Ragnar Torvik, 2003. "Optimum Currency Areas Under Inflation Targeting," Open Economies Review, Springer, vol. 14(2), pages 99-118, April.
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  6. Barry Eichengreen, 2006. "Can Emerging Markets Float? Should They Inflation Target?," Chapters, in: Monetary Integration and Dollarization, chapter 8 Edward Elgar.
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  8. Ivan Roberts & Rod Tyers, 2003. "China's Exchange Rate Policy: The Case for Greater Flexibility," Asian Economic Journal, East Asian Economic Association, vol. 17(2), pages 155-184, 06.
  9. Cargill, Thomas F. & Parker, Elliott, 2004. "Price deflation, money demand, and monetary policy discontinuity: a comparative view of Japan, China, and the United States," The North American Journal of Economics and Finance, Elsevier, vol. 15(1), pages 125-147, March.
  10. Dai, Meixing & Sidiropoulos, Moïse, 2002. "Règle du taux d'intérêt optimale, prix des actions et taux d'inflation anticipé : une étude de la stabilité macroéconomique
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  11. Virginie Coudert & Cécile Couharde, 2005. "Real Equilibrium Exchange Rate in China," Working Papers 2005-01, CEPII research center.
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