Continued from
China is fast becoming a force to reckon with in the international market as it develops its economy and its integration to the world economy is maintained, a stable monetary policy for the Chinese government will be vital to sustain a stable and non-inflationary growth. In recent years, China has been known to operate its Monetary Policy under complicated restrictions that includes a fixed exchange rate, an immature financial system and a number of organizational flaws. And the first order of business would be to have an independent monetary policy and maintaining an exchange rate system that carries a limited de facto flexibility exposes the nation’s economy to the major risk of macroeconomic instability. Although there is some space for movement in the monetary policy mainly due to capital control, this space is quite limited and can end in insufficient control of investment development and inflationary/deflationary stress.
Moreover, the efficiency of capital controls wears away over time as domestic and international investor find means and includes escalating trades and includes expanding trade to avoid them. These matters have led authorities to start moving towards a flexible exchange rate regime.
On July 21, 2005, the renminbi, China’s currency, was re-valued by 2.1 percent comparative to the US dollar and it was published that the worth of the renminbi would hereafter be set with reference to a number of currencies rather than having it measured against the dollar. Nevertheless, the renminbi has been kept at a constant level comparative to the dollar, indicating very restricted de facto flexibility. However, the authorities have undeniably affirmed their intent to permit for larger flexibility over time (Goodfriend & Pasad, 2006).
A significant consequence of gearing towards a flexible exchange rate is required to adopt a new nominal anchor and a connected stratagem for monetary policy. Theoretically speaking and from experiences gathered from across the globe, from superior industrial markets plus the emerging market economies, propose that the most reliable path to for People’s Bank of China to soothe domestic inflation and employment versus macroeconomic shock is to make low inflation the main thrust of the monetary policy.
Making inflation an objective can put up productivity growth and varied relationship between monetary and credit collectives and inflation instabilities, which are all significant subjects in a budding economy. It also fosters easy communicability.
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