Interest rates the preferred policy instruments

Comments on Feng Lu “China needs to raise interest rates”, 27/05/2010, http://www.eastasiaforum.org/2010/05/27/china-needs-to-raise-interest-rates/

Clearly the monetary authority in China should use both interest rates and other quantitative measures to have the most effective and optimal monetary policy effects.

One of the problems with not using interest rates is that it undervalues the costs of finance and the value of savings in the most direct way.

The benefits of savings are not accruing to savers, but are realised by the banks or wasted in the inefficiency in finance due to quantitative measures.

If it is not in a liquidity trap situation, monetary authorities should use price signals as much as possible, that is, interest rates, as their policy instruments.