Chat with AIExam 8: Monetary Policy in Action
What is the main difference between the stated goals of the People's Bank of China (PBC) and the Federal Reserve Bank of the United States (the Fed).
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VerifiedFor the Federal Reserve the main targets to control are output, unemployment, and inflation. For the PBC, though the wording has a certain ambiguity, the exchange rate appears to be a target along with output and inflation. China's exchange rate is not floating, so as we discuss in the chapter, monetary policy needs to be consistent with a quasi-fixed exchange rate. Controlling inflation is a necessary but not sufficient condition for controlling the exchange rate.
Even though China does control international capital mobility, it still needs to undertake the increasingly difficult task of sterilization. Explain why China, in its efforts at controlling its exchange rate, has in effect lost a degree of control over its monetary policy. Discuss both the magnitude and volatility of exports as factors.
(34) VerifiedOne difficulty is that in fact opportunities for capital mobility have increased particularly since a part of China (e.g., Hong Kong) is fully integrated into international capital markets. Even ignoring this factor, China resembles more closely the old "gold specie" mechanism where international trade imbalances (surpluses in China's case) could impact a country's money supply by the sheer force of reserve accumulation. Figures MF8.1 highlight the close link between China's reserves and current account balances. So while the BOP capital account may be controlled, the current account allows for reserve accumulation and in turn this impacts in a significant way the monetary authorities' balance sheet. That impact (an increase in the money supply or banking system liabilities) necessitates a response from the monetary authorities. So in effect, the huge role of the current account surplus implies some loss of control (a required reaction) from the monetary authorities.
Eventually if China is to have a high degree of international capital mobility, explain what it will have to give up in terms of a key policy variable. Why?
(33) VerifiedAccording to the policy trilemma, China will have to give up control of the exchange rate (allow it to float), if it were to allow free capital mobility (unfettered financial flows in and out of the country). At the simplest level, international capital mobility would mean the RMB would trade freely offshore in non-Chinese-controlled markets (e.g., London). A separate exchange rate would be established in these international markets. Having two prices for the same financial asset (the RMB) is not sustainable over the long run since that would create tremendous arbitrage opportunities.
Go to the IMF's Annual Report on Exchange Arrangements and Exchange Restrictions (2013) (www.imf.org/external/pubs/nft/2013/areaers/ar2013.pdf) and identify how China's exchange rate regime is classified. Explain its regime classification with its monetary policy classification.
(39) In terms of the traditional capital structure theories for companies, explain how China's government policies and special economic circumstance may modify the conventional approaches to capital structure.
(43) Why does China's PBC use so many tools to control the financial system compared to the Fed?
(27) Explain the traditional "transmissions mechanism" and why it is still a "work-in-progress" description of how monetary policy works in China.
(30) Go to FRED (the Federal Reserve Economic Database) and compare the Lending-Deposit spread with the ninety-day interbank interest rate (produce a graph to show the comparison). Explain why one is highly volatile and the other is relatively stable (period to period).
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