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A Framework for Independent Monetary Policy in China

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  • Marvin S Goodfriend
  • Eswar S Prasad

Abstract

As China's economy becomes more market based and continues its rapid integration into the global economy, having an independent and effective monetary policy regime oriented to domestic objectives will become increasingly important. Employing modern principles of monetary policy in light of the current state of China's financial institutions, we motivate and present a package of proposals to guide the operation of a new monetary policy regime. Specifically, we recommend an explicit low long-run inflation objective, operational independence for the People's Bank of China (PBC) with formal strategic guidance from the government, and a minimal set of financial sector reforms (to make the Chinese banking system robust against interest rate fluctuations). We argue that anchoring monetary policy with an explicit inflation objective would be the most reliable way for the PBC to tie down inflation expectations, and thereby enable monetary policy to make the best contribution to macroeconomic and financial stability, as well as economic growth. The management and monitoring of money (and credit) growth by the PBC would continue to play a useful role in the stabilization of inflation, but a money target would not constitute a good stand-alone nominal anchor.

Suggested Citation

  • Marvin S Goodfriend & Eswar S Prasad, 2006. "A Framework for Independent Monetary Policy in China," IMF Working Papers 06/111, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:06/111
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    References listed on IDEAS

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    1. Marvin Goodfriend & Robert King, 1997. "The New Neoclassical Synthesis and the Role of Monetary Policy," NBER Chapters,in: NBER Macroeconomics Annual 1997, Volume 12, pages 231-296 National Bureau of Economic Research, Inc.
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    5. Alfred Broaddus & Marvin Goodfriend, 1996. "Foreign exchange operations and the Federal Reserve," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 1-20.
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    More about this item

    Keywords

    Central bank role; Central bank policy; China; Monetary policy; Bank reforms; Exchange rate flexibility; Financial systems; Flexible exchange rates; Money supply; Inflation targeting; Transition economies; financial sector reforms; inflation; central bank; low inflation; inflation objective; Central Banking; And The Supply Of Money And Credit; socialist Systems And Transitional Economies;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • P2 - Economic Systems - - Socialist Systems and Transition Economies

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