China s Monetary Policy Surprise

China s Monetary Policy Choice

Monetary policy and institutions

Why is Monetary Policy Underrated?

Shinzo Abe s Monetary Policy Delusions

1. Strongly anti inflationary monetary policy.

What Monetary Policy Does China Need?

Is US Monetary Policy Made in China?

It is time to adjust monetary policy.

These exclusive affairs of State include external relations, defence policy and monetary policy.

The past two generations have witnessed the rise of independent central banks whose monetary policy, largely insulated from partisan politics, aims for the maximum possible employment and purchasing power consistent with price stability. Monetary policy in the industrial core has been far from perfect in this age of independent central banks, but it has been much better than what came before, representing a victory for technocracy.

Typically, monetary policy is one of the policy tools for managing the balance of payments.

The market had strongly expected adjustments to UK monetary policy.

The fact is that, with a flexible exchange rate, a country can offset the recessionary impact of a neighboring country s monetary easing using its own independent monetary policy, guided by carefully chosen inflation targets. If all countries adopt this approach, the entire global economy benefits.

Of course, a country s monetary policy does affect exchange rates in the short term. But it does so only in relation to monetary policy in other relevant countries.

Most notably, eurozone countries have faced powerful asymmetric shocks, to which their lack of independent monetary policy instruments made it virtually impossible to respond. As a result, they have struggled with recurring economic crisis.

Political scientists talk about democratic delegation the idea that a sovereign might want to tie its hands (through international commitments or delegation to autonomous agencies) in order to achieve better outcomes. The delegation of monetary policy to an independent central bank is the archetypal example in the service of price stability, daily management of monetary policy is insulated from politics.

Contrary to those who regard the discussion of an alternative monetary framework as premature, there are good reasons for China to begin right now to build the institutional foundation for the transition to an independent monetary policy. Indeed, early adoption of a low inflation objective would help secure the monetary and financial stability that China needs as it allows greater exchange rate flexibility.

The territorial Executive shall be consulted with respect to decisions on monetary policy.

In any case, the success of monetary policy is difficult to deny. As the deflation gap narrows, however, the overall impact of monetary policy will weaken, as it increasingly influences prices more than output.

Still to be argued out within the guild of economists , Samuelson wrote in 1969, is the proper quantitative potency of monetary versus fiscal policy. This question eventually was resolved in favor of monetary policy.

This is not the type of volatile monetary policy that Europe wants or needs.

Monetary policy needs to look beyond its core focus on low and stable inflation and pay much greater attention to financial stability. The debate now is how, exactly, to factor this imperative into monetary policy, and how to coordinate the work of monetary and regulatory authorities.

Moreover, unlike major developed economies, most of which have used up all of their conventional monetary policy ammunition by reducing their policy interest rates to zero, China has plenty of monetary stimulus on reserve to address cyclical disruptions. In these circumstances, it makes sense for China to lean more on monetary policy than on fiscal expansion.

Domestic monetary policy has become the first and last line of defense against growth slowdowns and financial panics, enabling policymakers to avoid pursuing other important, but far more difficult measures. Using monetary policy to compensate for deficiencies in other policy areas constitutes an institutional breakdown monetary policymakers are not necessarily getting it wrong, but they are constrained by the configuration of other policies.

If monetary policy is used to try to push unemployment below some pre determined level, inflation will accelerate without limit and destroy jobs. A monetary policy aiming for sub NAIRU unemployment must therefore be avoided at all costs.

Europe s monetary unification of the 1990 s was supposed to be accompanied by fiscal convergence and harmonization. When budgets move in different directions, pressures shift to regional policy (to redistribute income) and to monetary policy (to boost growth).

What China really needs is a truly independent monetary policy oriented to domestic objectives. This would enable the PBC to manage domestic demand by allowing interest rates to rise in order to rein in credit growth and deter reckless investment.

The current approach, centered on unconventional monetary policy, is not the answer. Though monetary policy provided a powerful antidote to frozen credit markets in the depth of the global financial crisis, it has failed to spark classic cyclical recoveries.

The ECB has never claimed that its strategy is the ultimate solution to the challenges monetary policy is confronted with. But, it has recognised the need to include monetary analysis in a very broad sense into its policy considerations.

In China, unlike in advanced countries, monetary and sterilization policy are often one in the same. The degree to which monetary policy is expansionary depends on the degree to which the liquidity created by currency market intervention has been sterilized.

The International Monetary Fund continued to assist the Government, through a close policy dialogue, in maintaining macroeconomic stability, especially in the area of fiscal policy.

The German fascination with gold is a red herring. Its fear of wayward monetary policy is not.

Second, the euro area benefits from an independent European Central Bank whose swift actions to ease liquidity constraints and coordinate monetary policy have recently helped to avert a financial meltdown. Such rapid, coordinated steps by 16 national central banks would have been unthinkable.

This is not to say that sudden normalization of monetary policy is a good idea. But, if large scale investment and reform programs were initiated as complements to unconventional monetary policy measures, the economy could move onto a more resilient growth path.

In principle, the answer is straightforward. If a central bank has two policy targets, then it needs two instruments monetary policy to influence aggregate demand, and regulatory policy to limit financial risks.

Secondly, it would insulate domestic economies from external developments, thereby permitting monetary policy to focus on redressing unemployment.

A seminar in Ukraine, organized with the International Monetary Fund, examined problems of wage policy, including wage arrears.

A two year project with the International Monetary Fund on macroeconomic policy had recently come to an end with positive results relating to fiscal, exchange and monetary targets and structural reform.

What this really highlights, however, is the importance of framing the debate about exchange rate flexibility in a broader context. Having an independent monetary policy that could counteract boom and bust cycles would be the best way for China to deal with such risks.

Independent central banks are a great thing, and ECB President Mario Draghi is a great central banker. But that independence is meant to apply to monetary policy (jacking up interest rates if necessary, however unpopular it may be) and not to fiscal policy (forcing a country to cut expenditures and raise taxes to pay outstanding debt).

Undertaken by politicians, an audit might be viewed as an opportunity to score political points or steer policy in self serving directions, with delicate information leaked in order to pressure policymakers. While monetary policy conducted by independent bureaucrats is imperfect, handing over effective control to congressmen with one eye on the next election would be infinitely worse.

Monetary policy was centralized and entrusted to an independent central bank, while fiscal policy was left to the member states. National governments were made subject under the excessive deficit procedure to the twin constraints that fiscal deficits should not exceed 3 of GDP and government debt should remain below 60 of GDP (or at least tend towards that value).

The proactive fiscal policy that Li pledged at Davos will help, but monetary policy also needs to change. The conundrum facing China s authorities is that monetary expansion would merely fuel a run up in asset prices, rather than resulting in higher credit flows to the real economy.

It remains to be seen whether it can effectively restore some monetary policy influence. However, an important issue is rarely mentioned in small, open economies a description that applies to almost every country except the US the main channel of monetary policy is the exchange rate.