Scandinavian Working Papers in Economics
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Research Institute of Industrial Economics (IFN) Working Paper Series

No 696:
The Transition to Marked-Based Monetary Policy: What Can China Learn from the European Experience?

Lars Oxelheim () and Jens Forssbęck ()

Abstract: We discuss the prospects for Chinese money market development and transition to market-based monetary policy operations based on a comparative historical analysis of the present Chinese situation and the development in 11 European countries from 1979 up to the launch of European Economic and Monetary Union (EMU). Central banks in the latter group typically had an incentive to encourage the formation of efficient benchmark segments in the domestic money markets for the conduct of open market operations as traditional quantity-oriented instruments became increasingly ineffective. China is displaying many of the same symptoms as the European countries in the 1970s and 1980s, including poor monetary transmission due to excess liquidity and conflicts of interest due to unclear priority among multiple policy goals. We conclude that the current Chinese multiple-target monetary policy is counter-productive to efforts to develop an efficient money market that can serve as arena for an effective market-based monetary policy.

Keywords: Monetary Policy Operations; Money Market; China; European Union; Deregulation; (follow links to similar papers)

JEL-Codes: E42; E52; F41; (follow links to similar papers)

60 pages, February 6, 2007

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This paper is published as:
Oxelheim, Lars and Jens Forssbęck, (2007), 'The Transition to Marked-Based Monetary Policy: What Can China Learn from the European Experience?', Journal of Asian Economics, Vol. 18, No. 2, pages 257-283

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