In fact, the PBOC has little choice but to engage in monetary policy loosening. But it can avoid the pitfalls of such an approach by placing it within a broader, more comprehensive strategy that accounts for the underlying causes of the increase in funding costs for businesses.

Central banks in China, South Korea, Taiwan, Singapore, and Thailand, fearful of losing competitiveness relative to Japan, are easing their own monetary policies or will soon ease more. The European Central Bank and the central banks of Switzerland, Sweden, Norway, and a few Central European countries are likely to embrace quantitative easing or use other unconventional policies to prevent their currencies from appreciating.

Monetary policy and institutions

In addition to short term policy headaches, stronger currencies carry potentially significant costs in terms of hollowing out industrial and service sectors. So, after a varying mix of tolerance and heterodox responses, officials are pulled into loosening their own monetary policy in order to weaken their countries currencies or, at a minimum, limit the pace of appreciation.

China s Monetary Policy Surprise

China s Monetary Policy Choice

Europe s Easy Money Endgame

प रत स पर ध त मक म द र क सहजत क र कन

What Monetary Policy Does China Need?

Shinzo Abe s Monetary Policy Delusions

It is time to adjust monetary policy.

This prideful interpretation amounted to the siren song of an extremely accommodative monetary policy. Unable to disentangle the global and domestic pressures suppressing inflation, a price targeting Fed has erred consistently on the side of easy money.

Why is Monetary Policy Underrated?

Is US Monetary Policy Made in China?

1. Strongly anti inflationary monetary policy.

A single monetary policy for a currency area comprising 11 and later 12 countries, each with a sovereign national government, was something entirely new. Would it be compatible with autonomous national fiscal policies?

In some cases, currencies move in the same direction as monetary policy for example, when the yen dropped in response to the Bank of Japan s 2013 quantitative easing. But in other cases the opposite happens, for example when the euro and the pound both strengthened after their central banks began quantitative easing.

Moreover, in 1998, with Chile s stock market and currency heavily impacted by the economic fallout of the Asian crisis, the policy was substantially eased so as to be less of a barrier to capital inflows.

That brings us to monetary policy, the importance of which as a determinant of commodity prices is often forgotten. Monetary tightening is widely anticipated in the US, with the Federal Reserve having ended quantitative easing in October and likely to raise short term interest rates sometime in the coming year.

If a discrete exchange rate appreciation is to be sustained, it must reflect expected monetary policies tight money and deflation in the appreciated country, and easy money with inflation in the depreciated country. But domestic money growth in China s immature bank based capital market is high and unpredictable, while many interest rates remain officially pegged.

Typically, monetary policy is one of the policy tools for managing the balance of payments.

Declining economic growth strengthens the temptation to loosen monetary policy. But in today s deflationary environment, typical monetary expansion alone can do little to help the real economy, because the money either remains idle or fuels asset bubbles and capital outflows.

To support this effort, China s government should loosen its grip on the exchange rate, while maintaining appropriate capital controls. Renminbi internationalization should not be a policy priority.

To qualify for inclusion, the Chinese government has eased its capital controls and liberalized its financial markets considerably. Inclusion in the SDR basket would require continuing this process, which, together with the renminbi s emergence as a globally investable currency, would benefit the entire world economy.

Will Germany agree to such a relaxation or, for that matter, to Hollande s implicit demand that the ECB follow Japan s example and loosen monetary policy to drive the exchange rate back down?

NEW YORK Monetary policy has become increasingly unconventional in the last six years, with central banks implementing zero interest rate policies, quantitative easing, credit easing, forward guidance, and unlimited exchange rate intervention. But now we have come to the most unconventional policy tool of them all negative nominal interest rates.

The researchers Cynthia Wu and Fan Dora Xia estimate that the US Federal Reserve s open ended asset purchases (so called quantitative easing, or QE) have led to an effective US policy rate of 1.6 . QE helped American exports by weakening the dollar relative to other currencies.

The territorial Executive shall be consulted with respect to decisions on monetary policy.

This episode showed that the renminbi is under significant depreciation pressure, which is likely to intensify as the PBOC, amid weak GDP growth, loosens monetary policy (particularly as the US Federal Reserve is gradually tightening its monetary policy). Add to that efforts to liberalize the capital account and internationalize the renminbi, and some exchange rate volatility can be expected.

The US could benefit from such policies, as capital account regulation would force investors to find opportunities at home, while a true global reserve currency would free the US from concerns and harsh rebukes about the implications of its monetary policy on the global economy. At the same time, emerging markets would gain the full benefits of expansionary monetary policy in the US, to the extent that it boosts demand for their exports.

Moreover, unlike major developed economies, most of which have used up all of their conventional monetary policy ammunition by reducing their policy interest rates to zero, China has plenty of monetary stimulus on reserve to address cyclical disruptions. In these circumstances, it makes sense for China to lean more on monetary policy than on fiscal expansion.

The IMF s Lending Overhaul

Of course, a country s monetary policy does affect exchange rates in the short term. But it does so only in relation to monetary policy in other relevant countries.

On the one hand, pegging local currencies to the dollar renders monetary policy completely ineffective, as in a fixed exchange rate regime.

These exclusive affairs of State include external relations, defence policy and monetary policy.

All of this is happening in the midst of extremely expansionary monetary policies and near zero interest rates, except in the countries facing immediate crisis. Structural concentration of incomes at the top is combining with easy money and a chase for yield, driving equity prices upward.

At the time, many leaders seemed to think that the ECB's move would be enough Announcement made, money printed, economies back on track. Unfortunately, that is not how monetary policy works QE will not be enough, and no one should be naive about that.

The market had strongly expected adjustments to UK monetary policy.

In China, unlike in advanced countries, monetary and sterilization policy are often one in the same. The degree to which monetary policy is expansionary depends on the degree to which the liquidity created by currency market intervention has been sterilized.

The International Monetary Fund continued to assist the Government, through a close policy dialogue, in maintaining macroeconomic stability, especially in the area of fiscal policy.

Even if officials do not want to abandon the euro, they may come to do so as a result of a strategy of trying to get other countries to agree to a policy change. A country that believes that monetary or fiscal policy is too tight may threaten to leave if policy is not changed.

The Great Depression was intensified by poor monetary policy, tax hikes, and protectionist trade policies. Likewise, loose US monetary policy in the middle of the last decade helped to set the stage for the Great Recession by contributing significantly to an explosion of leverage and fueling the housing bubble that burst in 2007 2008.

The currency was in theory governed by a rules based Currency Board, which the British invented for their smaller colonies. It tied the local currency to the British Pound, giving local authorities no discretion in monetary policy.

We have tightened fiscal and monetary policies, and we are monitoring them very closely.

With traditional monetary policy becoming less effective, non traditional policy tools aimed at generating greater liquidity and credit (via quantitative easing and direct central bank purchases of private illiquid assets) will become necessary. And, while traditional fiscal policy (government spending and tax cuts) will be pursued aggressively, non traditional fiscal policy (expenditures to bail out financial institutions, lenders, and borrowers) will also become increasingly important.