Does monetary policy work?

CHINA ADVISORY - Report 16 Nov 2018 by Andrew Collier

Does Chinese monetary policy work? If the central bank changes interest rates, does the market react? Or are interest rates irrelevant and only fiscal policy – direct intervention – effective?

These questions are essential to understand the effectiveness of interest rate policy in China. Ultimately, if the central bank controls rates, it controls the efficiency of capital allocation and the productivity of the economy.

We would argue that China’s monetary policy is only partially effective, for two reasons: the existence of a state sector and the size of the shadow banking financial institutions. The question is – given these distortions, how effective is monetary policy?

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