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2011-03-15

China has some independence of monetary policy

Comments on Karen Maley “A seismic shift for China”, 15/03/2011, http://www.businessspectator.com.au/bs.nsf/Article/debt-deficit-emerging-economies-China-Wen-Jiabao-pd20110315-EXSXC?OpenDocument&src=sph&src=rot

This post shows both the author and Dalio had a poor understanding of China's use of reserve ratio as one of main methods to conduct its monetary policy in addition to its control of interest rates.

What China is doing is different from the conventional monetary policy prevailing in most western countries.

China's methods of conducting its monetary policy means it is not quite a free money market and there could be a need to ration credit one way or another, by banks.

But at the same time it also means it has its own independent monetary policy, unlike what Dalio's view is.

It is important to understand the facts and the mechanism of China's monetary policy to analyse how its policy should evolve, as opposed to simply apply conventional economics textbook approach to a different subject – the latter approach is wrong and gives the wrong conclusion.

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