1.
As the Chinese economy becomes more market based and continuesits rapid integration into the global economy, having an independentand effective monetary policy regime oriented to domestic objectiveswill become increasingly important. Employing modern principlesof monetary policy in light of the current state of China'sfinancial institutions, we motivate and present a package ofproposals to guide the operation of a new monetary policy regime.Specifically, we recommend an explicit low long-run inflationobjective, operational independence for the People's Bank ofChina (PBC) with formal strategic guidance from the government,and a minimal set of financial sector reforms (to make the Chinesebanking system robust against interest rate fluctuations). Weargue that anchoring monetary policy with an explicit inflationobjective would be the most reliable way for the PBC to tiedown inflation expectations, and thereby enable monetary policyto make the best contribution to macroeconomic and financialstability, as well as economic growth. The management and monitoringof money (and credit) growth by the PBC would continue to playa useful role in the stabilization of inflation, but a moneytarget would not constitute a good stand-alone nominal anchor.(JEL codes: E5 and P2)
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