Monetarism With Chinese Characteristics

Monetarism is often misunderstood, overlooked, forgotten, or even derided. Yet its basic logic, resting on the quantity theory of money, is evident and remains important in a world of pure fiat monies.Most major central banks have abandoned monetary targeting in favor of setting interest rates to achieve long-run price stability and full employment. China is an exception. Since 1998, thePeople ’s Bank of China (PBC) has used money growth targets to guide monetary policy aimed at maintaining stable nominal income growth and preventing excess inflation (see Figure 1).Figure 1: PBC Monetary Framework[1]That said, the PBC ’s use of monetary targeting is embedded within China’s centrally planned and largely nationalized financial system. The PBC is subject to oversight by theState Council; the financial system is dominated by state-owned banks; capital markets are highly regulated; and interest rates and exchange rates are distorted. Just as the Chinese government refers to its unique mix of markets, statism, and communist ideology as “Socialism with Chinese Characteristics,” we can call the PBC’s monetary targeting “monetarism with Chinese characteristics.”Use of Monetary Targets in ChinaUBS economist Tao Wang and her team describe the PBC ’s use of monetary targets:Unlike some developed central banks that directly target certain policy interest rates or inflation, the PBC has targeted broad monetary aggregates such as M2 since 1998 to achieve its key macroecono...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs