Edited by Gill Hammond, Ravi Kanbur and Eswar Prasad
8. A framework for independent monetary policy in China Marvin Goodfriend and Eswar Prasad INTRODUCTION AND OVERVIEW 8.1 As China’s economy develops and becomes more market oriented, and as its integration with the world economy continues, monetary policy will need to shoulder an increasingly large burden in ensuring stable, non-inflationary growth. Rising integration, for instance, implies greater vulnerability to external shocks, and monetary policy is typically the first line of defense against such shocks. Although deeper structural reforms may be the key determinants of long-term growth, monetary policy has an important role to play in creating a stable macroeconomic environment that is essential for those reforms to take root. Monetary policy in China has in recent years operated under difficult constraints, including a fixed exchange rate regime, an underdeveloped financial system and numerous institutional weaknesses. Having an independent monetary policy is an important policy priority. Maintenance of an exchange rate regime with limited de facto flexibility exposes the economy to significant risks of macroeconomic instability. While capital controls provide some room for maneuver for monetary policy even under such a regime, this room tends to be limited in practice and could result in inadequate control of investment growth and inflationary (or deflationary) pressures. Moreover, the effectiveness of capital controls inevitably erodes over time as domestic and international investors find channels, including rising trade, to evade them. These considerations have led the authorities to initiate a move towards a more flexible exchange rate regime. On 21 July 2005, the renminbi was...
You are not authenticated to view the full text of this chapter or article.
Elgaronline requires a subscription or purchase to access the full text of books or journals. Please login through your library system or with your personal username and password on the homepage.
Non-subscribers can freely search the site, view abstracts/ extracts and download selected front matter and introductory chapters for personal use.
Your library may not have purchased all subject areas. If you are authenticated and think you should have access to this title, please contact your librarian.