Chinese Monetary Policy – From Theory to Practice
Published with modifications as: Körner, Finn Marten and Ehnts, Dirk H. (2016), "Chinese monetary policy – from theory to practice", In: Halberstadt, J., Jakob, C., Schuricht, M. "Jenseits des Elfenbeinturms", Josef Eul Verlag GmbH, Lohmar, ch. 7, pages 137-160
22 Pages Posted: 8 Feb 2013 Last revised: 27 Dec 2016
Date Written: February 7, 2013
Abstract
Chinese monetary policy constitutes a marked example of a clash between theory and practice. In theory, a fixed exchange rate regime with capital mobility turns the money supply into an endogenous variable while expansionary pressure can be alleviated by the central bank by foreign currency transactions. For China, this standard view is contended by the 'compensation thesis' as proposed by Lavoie and Wang (2012) according to which the central bank maintains discretion over money supply by using alternative balance sheet instruments. In this paper we show that the People's Bank of China's (PBoC) activities can be better characterized by the 'compensation thesis' view of alternative money supply operations. In addition, we can thus characterize the PBoC's policy stance as being directed at targeting inflation and exchange rate stability via a five-phase policy mix using sterilization bonds and reserve requirements according to macroeconomic conditions. After downgrading the loans-to-deposits ratio of 75% to the status of an indicator and given the rise in lending despite a high reserve ratio, the quantity-driven approach to monetary policy of the PBoC faces an uncertain future.
Keywords: Chineses monetary policy, nominal exchange rate, money supply, Mundell-Fleming, compensation thesis, Modern Money Theory, sterilization, loans-to-deposit ratio, reserve requirement ratio, credit and money suppply growth
JEL Classification: E31, E5, E58, F31, G21
Suggested Citation: Suggested Citation
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