Policy Forum

The CFDS publishes roughly bimonthly Policy Forums on current political and economic issues. Articles in our Policy Forum series are commentaries on current political issues. They reflect the opinion of the authors and – although researched to our best knowledge – are not scientific papers. If there are CFDS papers on related issues, they will be referred to in the text.

Policy Forum 15 (November 2021)

In recent years, the major central banks of the West have started expanding their original mandate of price stability, most notably maybe with Christine Lagarde’s ambition to conduct a “green” monetary policy. Contrarily, the People Bank of China (PBoC) has traditionally followed a broader agenda, supporting a wide array of the Chinese leadership’s economic objectives.

China has experienced astonishing development during the last four decades. The eastern coastal area benefited more from the early open policy because of its location and the development strategy of China. In the initial decades, the implications of the growing spatial inequality were attenuated because living standards in the rural Chinese hinterlands still increased considerably through trickle-down effects. However, these regions benefited to a substantially lesser degree. The increasing heterogeneity has become one of the major issues in the Chinese political landscape over time. Apart from the poverty in the hinterlands being perceived as a more pressing issue as the catching-up process slows, the considerable heterogeneity also poses an obstacle for policies that are in their very nature nationwide, such as monetary policy. Consequently, conducting a monetary policy that has a differentiated effect across the country’s regions and in doing so support the government’s poverty alleviation schemes became one of the PBoC’s major objectives.

Read the full article (in English)

Policy Forum 14 (June 2021)

China's external policy features exchange rate targets, capital controls and sterilized interventions. Although constrained by a strictly managed exchange rate, China's monetary policy can maintain considerable independence owing to capital control and sterilization measures. China's external policy features exchange rate targets, capital controls and sterilized interventions. Although constrained by a strictly managed exchange rate, China's monetary policy can maintain considerable independence owing to capital control and sterilization measures.

According to the official announcement in 1994, China established a managed floating exchange rate system based on market supply and demand. But the CNY exchange rate system was never a managed float in its true sense. The authority maintained tight control over the exchange rate and effectively pegged its currency to the U.S. dollar in the following decade. A new round of reform started in 2005, when China moved away from the fixed exchange rate regime and the CNY was allowed to crawl higher. However, this appreciation process stopped after the financial crisis in 2007, and the Chinese Yuan was re-pegged to the U.S. dollar. Again, since the second half of 2010, the CNY has become more flexible, with a gradually expanded fluctuation range centering around 1: 6.5.

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Policy Forum 13 (April 2021)

Instead of a normal policy forum, we want to seize the opportunity to give a glimpse into some of our ongoing work here at the CFDS that highlights why more work in the Chinese financial and monetary system is so important.

Over the last decade with China’s ascent in economic power, there has been an increasing interest in the Chinese economy. For a current work we collected more than 30 papers that estimate monetary policy shocks – i.e., unexpected changes of the policy stance of the People’s Bank of China – and their effect on the Chinese economy.  At first glance, it seems we – the scientific community – have quite a good idea about how monetary policy in China works. There is some controversy about the proper measurement of policy in China, since – unlike the US where the Federal Reserve Bank targets the federal funds rate – China does not have an official intermediate target. Some authors look at alternative interest rates that might fill that role, others look at money supply as the PBoC has been known to pay more attention to quantities than its Western counterparts, and a third group focuses on a narrative analysis of PBoC publications. But despite those differences, most studies find the expected outcomes in terms of the response of prices and production, suggesting that the different methodologies merely approach the same issues from slightly different angles.

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Policy Forum 12 (November 2020)

In the late 1970s, China started the path of economic reforms. China first established four Special Economic Zones in 1980 and Economic and Technical Development Zones in fourteen coastal cities in 1984. In order to attract foreign direct investment (FDI) and to encourage the development of a manufacturing export sector, the government allowed capital import with the ultimate goal to generate spillovers of management skills and technology. Outside of these zones, the government permitted the import and licensing of new technologies and capital goods to improve existing domestic enterprises. At the same time, the Chinese government reduced tariffs and non-tariff barriers on a unilateral basis and extended direct trading rights to more firms, finally allowing China to become a member of the World Trade Organization (WTO) at the end of 2001.

Since China joined the WTO in 2001, trade liberalization has significantly increased the openness of the economy. For example, in 2019, the total trade volume (imports and exports) was 31.54 trillion Yuan. (The exports were 17.23 trillion Yuan, and imports were 14.31 trillion Yuan). This corresponds to about 35% of GDP in that year (Figure 1).

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Policy Forum 11 (July 2020)

Modern Monetary Theory (MMT) is the latest fashion in post-Keynesian heterodox macroeconomics. It has left the fringes of academia and is, by the standards of a relatively new economic theory, widely discussed outside academic circles. Stephanie Kelton, one of its proponents, is the economic advisor of Bernie Sanders, twice a serious contender in the Democratic primaries for the Presidency of the United States. This essay explains what MMT is and discusses its central claims. It turns out that many of its tenets are either not new and consistent with mainstream economics or wrong. Nonetheless, MMT promotes some ideas and perspectives that should not be dismissed outright.
The Money in MMT refers to an economy with fiat money. Fiat money means that the money issued by the central bank that has no intrinsic value. While this is the norm today, money used to represent a claim on a commodity in one form or another. MMT also does not allow for any management of the exchange rate that would constrain the Government in its monetary actions, for example, due to international agreements. In the MMT world, the central bank becomes an integral part of the Government and cannot make any independent decisions. Contrary to what its name might seem to imply, MMT is not just concerned with monetary policy but aims to be an alternative to mainstream macroeconomics, not just conventional monetary policy.

Read the full article (in English and Chinese)


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