China: Strengthening Monetary Policy Implementation
IMF Working Papers, January 1, 2007
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Bibliographic details
- Authors: Bernard J Laurens, Rodolfo Maino
- Published: January 1, 2007
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451865783.001
Summary and main findings
- The People's Bank of China (PBC) has made great strides in modernizing its monetary policy frameworks but their effectiveness will diminish as the sophistication of the economy increases.
- Empirical evidence supports:
- maintaining a reference to money in China's monetary strategy, and
- enhancing the role of interest rates in its conduct.
- The authors advocate adoption of an eclectic strategy involving:
- monitoring of several indicators, and
- a short-term interest rate as the operational target.
- The PBC should be granted discretion to change its policy rate.
- There are no technical obstacles for such a move to occur in the near future.
Empirical basis and scope
- The paper presents empirical evidence supporting the continued reference to money in strategy and increased emphasis on interest rates.
- Subject areas covered: Bank credit, Banking, Inflation, Monetary base, Money markets.
- Keywords: banking sector, excess reserves, foreign exchange, inflation targeting, interbank market, money supply, WP.
Policy recommendations and operational implications
- Maintain a reference to monetary aggregates in the monetary strategy.
- Enhance the role of interest rates in monetary policy conduct.
- Adopt an eclectic strategy that monitors several indicators rather than relying on a single nominal anchor.
- Use a short-term interest rate as the operational target for monetary policy.
- Grant the PBC discretion to change its policy rate to improve policy responsiveness.
- Technical feasibility: the paper asserts there are no technical obstacles to implementing a policy-rate based operational framework in the near future.