Conclusions
Increased sophistication of People’s Bank monetary policy since the 1990s appears to have been accompanied by smaller deviations from the forecast values generated by an extended McCallum-type rule estimated over the 1991-2006 period.
There is evidence of a significant, and enduring, stepdown in the rate of both monetary base and M2 growth since the Asian financial crisis combined with some evidence of a countercyclical response to movements in the real exchange rate. Examination of the role played by growth in foreign exchange reserves suggests that reserve accumulation did not lead to any loss of control over the money supply through 2006. Overall monetary base growth appears to have remained unaffected by rising rates of foreign reserve accumulation, consistent with People’s Bank success in offsetting increases in foreign assets with decreases in domestic assets. The expanding market for central bank bills has provided a valuable weapon for such sterilization measures, helping the People’s Bank withdraw greater amounts of liquidity in the face of heightened rates of reserve accumulation.
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