Policy: Selection and Efficiency

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28 Οκτ 2013 (πριν από 3 χρόνια και 7 μήνες)

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1

X. Zhang

May 2011

Intermediary Targets of Chinese Monetary
Policy: Selection and Efficiency

2


Money aggregate and the incremental RMB loan as
the intermediary targets of monetary policy are
becoming less effective than before.



The PBC launched several initiations to enhance the
efficiency


Implement dynamic required reserve requirement


Amend M2


Compile M3 and “total finance aggregate”.



These measures are yet to be tested in the future.


Main Messages

3


Related theoretical background and
international experience



Evolution of China’s monetary policy,
intermediary targets and their efficiency



Recent development and future of monetary
policy intermediary targets in China

Outline

4

Theoretical background


Keynesian: the economic system is unstable, and money
is endogenous that can’t be controlled by the central
banks to reach monetary policy targets.


Interest rate is the intermediary target of money policy




Quantitative monetary theory: inflation a money issue, in
the long
-
run, an exogenous increase in money supply will
lead to proportionate reaction of the inflation.


Money supply became the most suitable intermediary targets

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Evolution of intermediary targets


Source: websites of various central banks

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Content of money supply


Source: Statistical bulletin of various central banks

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China in Transition


Financial innovation not active



Financial market less developed



However, with the opening of the financial market and
liberalization of interest rate, financial innovation will
improve and new financial products thrive. This will
increase the endogeneity of money, and pose new
challenges to monetary policy and its intermediary targets

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China’s monetary policy: Objectives
(1978
-
2010)



Prior to mid
-
1990s: “(the central bank, specialized bank
and other financial institutions) should target economic
development, currency stabilization and social and
economic efficiency enhancement.” (The Provisional
Regulation on Bank Management , 1986)



After 1995: “the objectives of monetary policy are to
maintain currency stability in order to facilitate economic
growth.” (Law on the People’s Bank of China, 1995)



The objectives have been adjusting along with the
economic development (Zhou, 2009)

9

China’s monetary policy:
intermediary
targets

(1978
-
2010)



Prior to 1983: total credit and cash inputs



1983
-
1998: credit quota



1998
-
2010: incremental loans



2011 to ?: ??

10

Money supply in China


M0 = cash in circulation


M1 = M0 + checkable demand deposit of enterprises and
other entities



M2 = M1 + savings deposit of residence + term and
other deposit of entities



Starting January 2010, the PBC started to compile money
statistics based on local and foreign currency statistics of
all financial institutions in the country according to the
IMF Handbook.

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Efficiency of intermediary targets


Targets and actual value of
monetary policy intermediaries

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Efficiency of intermediary targets


Financing Channels (RMB100
million)

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Efficiency of intermediary targets


Balance Sheet of PBC:
Foreign Assets
(RMB100
million)

14

Money aggregates vs. CPI and GDP

15

Money aggregates vs. CPI and GDP

16

Money aggregates vs. CPI and GDP

17

Regression results of CPI and money aggregates


Note: A constant terms was included in all equations, and numbers in the brackets are probabilities.

18

Cross correlation of CPI vs growth rates of M0
-
M2


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Cross correlation of GDP deflator vs growth rates of M0
-
M2

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Cross correlation of GDP growth vs growth rates of M0
-
M2

21

Impacts of money shock on GDP growth and inflation



22

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Recent development


The reduction in the efficiency of the intermediary
targets is compounded with institutional twisting
in China.



Three newly
-
introduced measures may be the
second best choice of the PBC until the
liberalization of the interest rates


Launch of dynamic RRR


Amendment of M2


Compilation of M3 and “total finance aggregate”