An Institutional Analysis of China's Reform of their Monetary Policy Framework

Zengping He and Genliang Jia

Economics Working Paper Archive from Levy Economics Institute

Abstract: This paper traces the history of China's reform of its monetary policy framework and analyzes its success and problems. In the context of financial marketization and the failure of the quantity-targeting framework, the People's Bank of China transformed its monetary policy framework toward one that targets interest rates. The reform includes two important institutional changes: establishing an interest rate corridor and decreasing the difficulty the Open Market Operations room faces in estimating the market demand for reserves. The new monetary policy framework successfully stabilizes the interbank offered rate. However, this does not mean that the new framework is sufficient. One important problem remaining to be solved is how to manage the effects of fiscal activities on monetary policy operations. This paper analyzes the fiscal effects on reserves in China's Treasury Single Account system. The missing role of the Treasury in monetary policy operations increases the difficulty for the central bank to achieve its interest rate target. A further reform is therefore needed to provide a coordination mechanism between the Treasury and the People's Bank of China.

Keywords: China; Monetary Policy Framework; Interest Rate Target; Fiscal Effects on Reserves (search for similar items in EconPapers)
JEL-codes: E42 E52 E58 P24 (search for similar items in EconPapers)
Date: 2019-04
New Economics Papers: this item is included in nep-cba, nep-cna, nep-mac, nep-mon and nep-tra
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