China’s Monetary Policy and Interest Rate Liberalization: Lessons from International Experiences
IMF Working Papers, May 1, 2014
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Bibliographic details
- Authors: Wei Liao, Sampawende J Tapsoba
- Published: May 1, 2014
- Series: IMF Working Papers
Summary and scope
- Authors: Wei Liao, Sampawende J Tapsoba
- Publication date: May 1, 2014
- Series: Working Paper No. 2014/075
- Issue: 075
- Volume: 2014
- Pages: 24
- Stock No: WPIEA2014075
- ISBN: 9781484366295
- ISSN: 1018-5941
Key research question
- Investigates the stability of the money demand function (MDF) in China in light of financial sector reforms, significant financial innovation (so-called shadow banking), and more liberalized interest rates.
International evidence and mechanisms
- Rapid development of the financial system often leads to structural shifts in the MDF.
- Financial innovation and liberalization alter:
- the sensitivity of money balances to income, and
- the sensitivity of money balances to the interest rate.
Empirical findings for China
- A stable long-run relationship between money demand, output, and interest rates existed between 2002 and 2008.
- That stable long-run relationship disappears after 2008.
- The timing of the structural break coincides with the period of rapid financial innovation, especially:
- growth in off-balance sheet intermediation, and
- growth in nonbank financial intermediation (shadow banking).
Implications for monetary policy
- Usefulness of M2 as an intermediate monetary target has declined with financial innovation and reform.
- Findings underscore the importance of moving toward increased reliance on more price-based targets such as interest rates.
Subjects and keywords (as listed)
- Subjects: Banking, Demand for money, Housing prices, Monetary base, Money, National accounts, Personal income, Prices, Velocity of money
- Keywords: Demand for money, Financial Innovation, Financial Liberalization, Housing prices, interest rate, interest rate liberalization, interest rate parameter, interest rate sensitivity, lending interest rate ceiling, liberalization, liberalization variable, MDF, Monetary base, monetary policy, Money Demand Function, Personal income, Velocity of money, WP
Source: IMF Working Paper "China’s Monetary Policy and Interest Rate Liberalization: Lessons from International Experiences", May 1, 2014, Working Paper No. 2014/075.