Reply to Ljungberg

Abstract

We are grateful to Jonas Ljungberg for his courteous and informative response to our pair of articles recently published in this Review.¹ We will argue that Ljungberg has misunderstood our intention on one central point. Since other readers may share this misunderstanding, we are happy to set the record straight. We also take this opportunity to stress a second central point which characterizes our work in this Review.     

Reply to Professor Yongding Yu

We are indebted to Professor Yu for his careful reading of our paper, and are pleased that he sympathizes with our argument that controls on purely financial capital inflows should not be relaxed so long as world interest rates remain unduly low. We agree that direct ＂real＂ investments into, and increasingly out of, China＇s economy need not be limited. These direct investment flows are now more or less balanced, without threatening a loss of monetary control by the People＇s Bank of China （PBC）.     

Reply

Conclusion There are strong theoretical arguments in favor of the private sector approach. If there also would have been theoretical arguments in favor of the banking approach, then Boeschoten would have been right in claiming that the degree to whether the private sector or the banking approach is valid has to be verified empirically. However, the theoretical arguments put forward by Boeschoten in support of the banking approach are either incorrect or empirically not very relevant. Thus, the degree to which either approach is valid does not seem to be a purely empirical question.The views expressed in this paper are those of the author and do not necessarily reflect the views of the International Monetary Fund. The author thanks David Coe and Frank Lakwijk for their valuable comments on an earlier version.