Monetary policy under fixed exchange regime: A study on the future monetary policy in China

Gang Gong () and Jian Gao
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Gang Gong: School of Economics, Nankai University, Tianjin 300071, China
Jian Gao: China Development Bank, Beijing 100037, China

Frontiers of Economics in China-Selected Publications from Chinese Universities, 2008, vol. 3, issue 2, 169-208

Abstract: Using a macro dynamic model that is specified for the current Chinese economy, we investigate the monetary policy in China under the assumption that the capital market was ¡°open¡± under WTO frame-work while the exchange rate was fixed. Our purpose here is to find whether it is possible for China in this case to keep the effective monetary policy for stabilizing the domestic economy. For this, we suggest some institutional arrangements (or restrictions). Given these institutional restrictions, we find that not only the monetary policy can still be effective but also the fixed exchange regime will strengthen the macroeconomic stability shared by both the domestic economy and the economy of its trade partners. The dynamic analysis of the model further shows that the under-valued RMB is necessary for the target exchange rate to be sustainable. Finally, due to the import pattern of the current Chinese economy, RMB appreciation will not help to resolve the trade deficit problem in the Western economy with respect to China.

Keywords: Chinese economy; open economy tri-lemma; macroeconomic stability; exchange rate regime (search for similar items in EconPapers)
JEL-codes: E12 E4 E5 F31 F4 (search for similar items in EconPapers)
Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:fec:journl:v:3:y:2008:i:2:p:169-208

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