Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

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

Lars Oxelheim () and Jens Forssbæck ()
Additional contact information
Lars Oxelheim: Research Institute of Industrial Economics, Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden
Jens Forssbæck: Lund University, Postal: SE-220 07 Lund, Sweden

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

JEL-codes: E42; E52; F41

60 pages, February 6, 2007

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