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Intermediate Targets for Chinese Monetary Policy: Insights from Risto Herrala

This text discusses the challenges and potential solutions for intermediate monetary targets in the context of Chinese financial system evolution. It explores the ineffectiveness of previous targets, promising new approaches, and issues of regulation and liberalization. Risto Herrala expresses views on the need for improved strategies amid changing financial landscapes.

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Intermediate Targets for Chinese Monetary Policy: Insights from Risto Herrala

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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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