The Transition to Market-Based Monetary Policy: What Can China Learn from the European Experience?

61 Pages Posted: 30 Aug 2007

See all articles by Jens Forssbæck

Jens Forssbæck

Lund University - Department of Economics

Lars Oxelheim

Research Institute of Industrial Economics (IFN); University of Agder; Knut Wicksell Center for Financial Studies, Lund University

Abstract

We discuss the prospects for Chinese money market development and transition to market-based monetary policy operations based on a comparative historical analysis of the present Chinese situation and the development in 11 European countries from 1979 up to the launch of European Economic and Monetary Union (EMU). Central banks in the latter group typically had an incentive to encourage the formation of efficient benchmark segments in the domestic money markets for the conduct of open market operations as traditional quantity-oriented instruments became increasingly ineffective. China is displaying many of the same symptoms as the European countries in the 1970s and 1980s, including poor monetary transmission due to excess liquidity and conflicts of interest due to unclear priority among multiple policy goals. We conclude that the current Chinese multiple-target monetary policy is counter-productive to efforts to develop an efficient money market that can serve as arena for an effective market-based monetary policy.

Keywords: monetary policy operations, money market, China, European Union

JEL Classification: E42, E52, F41

Suggested Citation

Forssbaeck, Jens and Oxelheim, Lars, The Transition to Market-Based Monetary Policy: What Can China Learn from the European Experience?. Journal of Asian Economics, Vol. 18, No. 2, 2007, Available at SSRN: https://ssrn.com/abstract=1010092

Jens Forssbaeck

Lund University - Department of Economics ( email )

P.O. Box 7082
S-220 07 Lund
Sweden

Lars Oxelheim (Contact Author)

Research Institute of Industrial Economics (IFN) ( email )

P.O. Box 55665
SE-10215 Stockholm
Sweden
+46 8 665 4527 (Phone)
+46 8 665 4599 (Fax)

University of Agder ( email )

Serviceboks 422
N-4604 Kristiansand, VEST AGDER 4604
Norway

Knut Wicksell Center for Financial Studies, Lund University ( email )

P.O.Box 7080
S-220 07 Lund
Sweden
+46462228744 (Phone)

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