An evolutionary theory of central banking and central banking in China

Xiangmin Liu

Chapter 8 in Research Handbook on Central Banking, 2018, pp 128-154 from Edward Elgar Publishing

Abstract: This chapter employs the basic framework of modern evolutionary theory to understand the evolution of central banking both around the world and in China. The key mechanism of evolution involves a three-stage process: differentiation, selection, and amplification. This evolutionary algorithm selected previously dominant central banking models around the world, including the ones practiced in China over the past century. The previous paradigm of central banking was that of the "single mandate", ie, the exclusive focus on achieving and maintaining monetary stability. The global financial crisis induced a dramatic change in the environment that central banks operate in, which rendered the single mandate model obsolete and demanded a new and fitter model of central banking to cope with new financial and economic realities. A "dual mandate" model of central banking, which re-focused central banking on financial stability as well as monetary stability, emerged as the new paradigm. Macroprudential policies became the latest weaponry at central banks' disposal to accomplish their newly mandated dual missions. China's reform era central banking development bore the same evolutionary logic: the People's Bank of China evolved from a soviet-style state bank to the country's designated central bank with a heavy planned economy legacy and then to a more modern central bank following and advocating market principles and converging with (but also differentiating from) international practices, reflecting fundamental changes in the country's underlying economic and political conditions and changing demands for central banking. China's latest experiences dealing with its own domestic financial headwinds, in addition to international developments, helped spawn a new round of central banking and financial regulatory reforms there.

Keywords: Economics and Finance; Law - Academic (search for similar items in EconPapers)
Date: 2018
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