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2010-05-28

Monetary policies and allocative efficiency

Second 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/
In my last comment (see here), I said the importance and benefits of using price signal as a monetary policy instrument. In addition to what's been said there, the allocative efficiency should not be overlooked and underestimated.

Having said that, I was wondering how the Chinese monetary authority is going to use other measures to rein in excessive money already supplied and in circulation.

I am not sure the normal monetary policy of open market operation in west countries, especially in the US, may necessarily apply with the same effects in China.

If money in circulation is excessive and banking intermediaries are restoring their lending to the normal levels prior to the GFC onslaught, then it is imperative to use measures to reduce the amount of money in circulation to combat inflation pressures.

It remains to be seen how the Chinese monetary authority will do that in the most effective and efficient way in the sense that it has the minimum effects on allocative efficiency in the economy.

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