Strengthening the People’s Monetary Policy

A new working paper from the Fund- China: Strengthening Monetary Policy Implementation;

Summary: The People's Bank of China (PBC) has made great strides in modernizing its monetary policy frameworks but their effectiveness will diminish as the sophistication of the economy increases. Empirical evidence supports maintaining a reference to money in China's monetary strategy and enhancing the role of interest rates in its conduct. We advocate adoption of an eclectic strategy involving the monitoring of several indicators, and of a short-term interest rate as the operational target. The PBC should be granted discretion to change its policy rate, and there are no technical obstacles for such a move to occur in the near future.

One box in the paper discusses initial conditions for inflation targeting;

“The initial conditions for inflation targeting can be divided into four groups. First is a mandate to pursue an inflation objective and accountability by the central bank for meeting this objective, autonomy to set monetary instruments accordingly, and transparency in policy formulation and implementation. Second, there is a need to ensure that the inflation target will not be subordinated to other objectives, and the external position is stable to enable monetary policy to focus on achieving the inflation target. Third, the financial system should be developed and stable enough so that monetary policy is not sidetracked by concerns about the health of financial institutions. Markets should be sufficiently developed to enable reliance on marketbased monetary instruments. Fourth, the central bank needs the proper policy tools to influence inflation on the basis of a reasonable understanding of the links between the stance of policy and inflation.”

Further reading;
Challenges to China’s monetary policy
Implementation of Monetary Policy and the Central Bank's Balance Sheet
Monetary Policy Implementation at Different Stages of Market Development
Monetary Policy Implementation at Different Stages of Market Development
Country Cases and Appendices—Supplementary Information
China Program Working Papers- SCID