Risk, Regulation and Policy
Chapter 4: Central bank and monetary policy
There has been widespread belief that some aspects of the conduct of monetary and credit policies contributed directly to the most recent financial crisis. It is suggested that it was the failure of the central banks that brought on the banking collapse in the financial crisis. Against this background, there have been some discussions about the appropriate role for central banks and the appropriate design of their policies in the aftermath of the financial crisis. Meanwhile, central banks in major economies have taken some reform initiatives or have been set on a course of some changes. For example, the Bank of Japan (BoJ) has in the past 15 years failed to defeat deflation. It has been trying to maintain its independence by objecting to setting an inflation target and by adopting a more timid goal. The BoJ has also been reluctant to be seen to finance government spending directly since this would shield the government from raising taxes, cutting spending and forcing a restructuring of industry. The new Japanese government is likely to set an inflation target and to make the BoJ governor to be held accountable. Setting a mandatory inflation target is no radical departure from central bank orthodoxy. The Bank of England has “imported” a Canadian central banker and hopefully Canadian financial stability as well. The reassessment of the latest financial crisis seems to suggest a causal link between central banks’ failings in formulating effective monetary policies and the financial crisis. It is widely recognized that China should supposedly have more control over its economy than other countries. Banking reform in China, however, has had its limits, which was manifested by the economic pattern affected by the monetary policy of the People’s Bank of China’s (PBOC), China’s central bank. This chapter looks into the monetary policies of the PBOC and some aspects of China’s central bank governance that may affect its formulation of various monetary policies. This chapter also tries to “rationalize” the PBOC’s monetary policies and challenges in the context of the Chinese and global economy. This chapter contains three sections. Section 1 mainly investigates the monetary policies which the PBOC crafted to respond to the latest global financial crisis. Section 2 goes through major factors which affect the formulation of monetary policies by the PBOC. A short conclusion wraps up the chapter in Section 3.
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