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Targets: Why Money and Credit?

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Remaking Monetary Policy in China

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Abstract

The People’s Bank of China was not very explicit about its views on the transmission processes of monetary policy in the 2000s, but its statements were oriented around money and credit quantity targets. This contrasted with international ‘new macroeconomic consensus’ policy, which focused on interest rates. We explain why Chinese officials continued to use quantitative targets: mainly as an anchor for tighter policy, rather than any belief in a stable demand-for-money function. Interest rates were not appropriate as an intermediate target because policymakers doubted their influence on investment.

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Notes

  1. 1.

    The PBC had begun announcing M1 and M2 targets in 1994 as it began winding down the Credit Plan (Bell and Feng 2013, pp. 165–167), and decided on M2 as the key aggregate in 1996. It continued to announce M2 targets through the 2000s, but dropped M1 in 2007 (Sun 2013, p. 59).

  2. 2.

    The Mishkin textbook Dai promoted at the PBC introduces monetary policy through the control of the monetary base and the bank money multiplier, and the demand-for-money function. But it is presented explicitly as an over-simple model used for pedagogical purposes. Mishkin (1995, pp. 379–380, 383–402) acknowledges that variability in the money multiplier means that the central bank does not necessarily control the money supply even if it controls the monetary base. He also makes clear that the stability of demand for money in the United States seemed to break down after the mid-1970s and that the Federal Reserve abandoned monetary targets by the early 1990s (Mishkin 1995, p. 511). He describes the simple monetarist model of the transmission process of monetary policy as a ‘black box’, depending on statistical regularities between money supply and aggregate nominal income but not explaining the channel of cause and effect (Mishkin 1995, p. 657). (We refer to the edition most likely to have been originally distributed by Dai at the PBC, but these passages remain in later editions.)

  3. 3.

    A 2003 PBC report explained that hitting the monetary targets could be difficult because of time lags in the transmission process, and because the bank money multiplier varied (PBC 2003, Box 1).

  4. 4.

    As discussed below, the authorities would deal with the monetary effects of the large balance-of-payments surpluses of the 2000s with various sterilisation methods. The currency was also allowed to appreciate later in the decade.

  5. 5.

    Goodhart (1989, pp. 357–377) discusses this for the case of the United Kingdom, and Beggs (2015, pp. 230–243) for Australia.

  6. 6.

    Blinder (1998, p. 29) describes the US Federal Reserve’s turn to monetarism 1979–1982 as a political ‘marriage of convenience’ rather than an economic conversion: ‘Monetarist rhetoric provided the Fed with a political heat shield as it raised interest rates to excruciating heights’.

  7. 7.

    In later versions of the textbook, four of the nine transmission channels discussed run through bank loans (Mishkin 2004, p. 619).

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Authors and Affiliations

  1. Political Economy, University of Sydney, Sydney, NSW, Australia

    Michael Beggs

  2. Finance, University of Sydney, Sydney, NSW, Australia

    Luke Deer

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Correspondence to Michael Beggs .

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Beggs, M., Deer, L. (2019). Targets: Why Money and Credit?. In: Remaking Monetary Policy in China. Palgrave Pivot, Singapore. https://doi.org/10.1007/978-981-13-9726-4_3

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  • DOI: https://doi.org/10.1007/978-981-13-9726-4_3

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  • Publisher Name: Palgrave Pivot, Singapore

  • Print ISBN: 978-981-13-9725-7

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