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Monetary policy under fixed exchange regime: A study on the future monetary policy in China

Author

Listed:
  • GONG Gang

    (School of Economics, Nankai University, Tianjin 300071, China)

  • GAO Jian

    (China Development Bank, Beijing 100037, China)

Abstract

Using a macro dynamic model that is specified for the current Chinese economy, we investigate the monetary policy in China under the assumption that the capital market was ¡°open¡± under WTO frame-work while the exchange rate was fixed. Our purpose here is to find whether it is possible for China in this case to keep the effective monetary policy for stabilizing the domestic economy. For this, we suggest some institutional arrangements (or restrictions). Given these institutional restrictions, we find that not only the monetary policy can still be effective but also the fixed exchange regime will strengthen the macroeconomic stability shared by both the domestic economy and the economy of its trade partners. The dynamic analysis of the model further shows that the under-valued RMB is necessary for the target exchange rate to be sustainable. Finally, due to the import pattern of the current Chinese economy, RMB appreciation will not help to resolve the trade deficit problem in the Western economy with respect to China.

Suggested Citation

  • GONG Gang & GAO Jian, 2008. "Monetary policy under fixed exchange regime: A study on the future monetary policy in China," Frontiers of Economics in China-Selected Publications from Chinese Universities, Higher Education Press, vol. 3(2), pages 169-208, June.
    • Handle: RePEc:fec:journl:v:3:y:2008:i:2:p:169-208
    as

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    File URL: http://journal.hep.com.cn/fec/EN/10.1007/s11459-008-0008-6
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Chinese economy; open economy tri-lemma; macroeconomic stability; exchange rate regime;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory

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