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Intermediate targets for Chinese monetary policy: comments on Zhang X.

Intermediate targets for Chinese monetary policy: comments on Zhang X. BOFIT workshop on Chinese monetary and exchange rate policies. The issue. Previous intermediate targets have become ineffective. Large discrepancies between loan growth and its target.

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Intermediate targets for Chinese monetary policy: comments on Zhang X.

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  1. Intermediate targets for Chinese monetary policy: comments on Zhang X. BOFIT workshop on Chinese monetary and exchange rate policies Risto Herrala

  2. The issue • Previous intermediate targets have become ineffective. • Large discrepancies between loan growth and its target. • Financial system develops continuously. • What should come next? • Quantity theory of money: inflation a monetary phenomenon • Promising candidates based on past correlations with CPI and GDP: • the dynamic reserve requirement ratio (RRR), • amended M2, • M3 and/or the total finance aggregate. Risto Herrala

  3. About intermediate targets • Serve as the operational targets. • Important properties from the mopo perspective: • Observable & controllable to a large degree by central bank • Link with the final targets of future inflation, output • Special challenges in China • Deregulation affects observability & controllability • Structural change blurs the link with the final targets • The stakes are especially high • How to contain the inflationary pressures • How to avoid a post-deregulation financial meltdown • Very welcome that the PBOC elaborates on its views. Risto Herrala

  4. My take on the new approach • Quantitative financial intermediate targets understandable: • Regulation enhances control • Financial markets still under-developed. • The suggested changes are a temporary ‘patch’ to the old system until liberalization • Quantitative financial targets have not been very successful in liberalized financial systems (euro area 2. pillar). Risto Herrala

  5. Issues of interest • How to quantify the intermediate target? • Considerable scope for growth in financial intermediation! • The role of transparency in enhancing effectiveness? • Regulated systems opaque • Extent of coordination with exchange rate target? • Regulation still brings some, but not unlimited, possibilities to pursue multiple goals. • Arbitrage may in part explain the ineffectiveness of the old intermediate targets. • Quantitative financial targets & deregulation? • Possibilities to control deregulation boom by quantitative financial targets. • The risk that arbitrage makes quantitative targets non-implementable. Risto Herrala

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