(Original title: two essays of Yi Gang: monetary policy is a science, but also an art)
Source: Golden Wool Workshop
Reading guide: Today's selection is Yi Gang Two essays: First, he is responsible for Central Bank Colleague published《 currency The preface of the book "Quantity, Interest Rate Regulation and Policy Transformation", entitled "China's Monetary Policy in Transition"; The first article is his speech during the 19th October last year, with the theme of interpreting the dual pillars of monetary policy and macro prudence.
Through reflection finance In the crisis, we all realized that monetary policy is not enough to maintain the stability of the financial system. The main source of financial system risks is financial pro cyclicality and cross market risk contagion. Macroprudential is the right medicine for financial pro cyclicality and cross market risk contagion. Therefore, in these practices, we proposed to improve the regulatory framework of the dual pillars of monetary policy and macro prudential policy, and let monetary policy and macro prudential policy as the dual pillars complement each other. One is to maintain the stability of the currency value. 2、 To maintain the stability of the entire financial system.
Yi Gang: China's Monetary Policy in Transition -- Preface to Monetary Quantity, Interest Rate Regulation and Policy Transformation
This is the preface of Yi Gang's book Money Quantity, Interest Rate Regulation and Policy Transformation (Author: Wu Ge, Li Bin)
As early as the 1930s, Keynes expounded the relationship between money quantity and interest (rate) in his classic book General Theory of Employment, Interest and Money. It is worth pondering that the title of this foundation work of modern macroeconomics contains three important macro variables, of which the latter two (namely "interest" and "money") are directly related to the field of monetary finance, which shows the natural close relationship between macroeconomics and monetary finance theory. Time has changed. In recent years, people have gained a lot of new understanding of the relationship between the quantity of money and interest rates and their policy choices, both in the theoretical circle and at the policy decision-making level. However, as far as I know, there are few works systematically analyzing them at home and abroad. I am pleased to see that the book Money Quantity, Interest Rate Regulation and Policy Transformation (China Financial Press, January 2016), recently published by researcher Wu Ge and researcher Li Bin, is based on solid macroeconomic theoretical research and rich monetary policy practice of the central bank, and in practical combination with the reality of China in transition, A series of valuable and innovative explorations have been carried out on monetary theory and practice.
Generally, quantity and price are two important aspects of insight into the "coin" of economic phenomenon, that is, under the influence of supply and demand forces, the market will automatically realize the dynamic equilibrium of quantity and price. The study of money is no exception, and the quantity of money and the price of interest rate are inherently unified in the equilibrium dynamics of the market. Therefore, from this perspective, there seems to be no essential difference between the economic information reflected by the quantity of money and the price of interest rates. However, perhaps due to the differences in the sensitivity of micro subjects to volume and price, or perhaps due to the different stages of macroeconomic development, there are significant differences in the choice and evolution of monetary policy volume and price regulation modes among countries. Even the same country may choose different monetary policy frameworks in different historical periods. In the United States, there have even been repeated processes in the choice of monetary quantity and interest rate price targets.
In theory, then, can the quantity of money and the price target of interest rate have both? If it is difficult to have both, then should the central bank choose the monetary quantity or the interest rate price target? If we choose the interest rate price target, how will we realize the gradual transformation of monetary policy framework from quantitative to price? These seemingly "ABC" problems are logically interlinked and progressive, and we have not combed and summarized them well in the past. This monograph by researchers Wu Ge and Li Bin explains this in detail, which fills the gap in this field. In addition to the general experience of developed countries, China's monetary policy transformation also has a very unique practical background, which includes problems such as excessive investment and overcapacity under the high investment development model, as well as the continuous expansion of soft budget departments under the structural characteristics of "two sectors", while the real economy such as manufacturing has "hollowing out of industries" and "difficulty in financing" "Expensive financing" and other complex phenomena. These are the real economic "soil" that cannot be ignored in the study of China's monetary policy transition.
From the practice of major emerging markets and transition countries in the world, the current monetary quantity target is becoming less attractive to the central banks of these countries. However, due to structural reasons such as underdeveloped market economy and financial system, it is impossible to achieve a price based monetary policy regulation system overnight. Then, what kind of monetary policy rules should be adopted has become a major practical challenge faced by these central banks, and China in transition is no exception. Although in recent years, China's economic and financial reform and Interest rate marketization Although the process of monetary policy is accelerating, quantitative tools are still playing an important role, which makes it possible for "quantity" and "price" to coordinate with each other to achieve the goal of monetary policy regulation, that is, to implement the mixed rule of monetary quantity and interest rate price tools during the economic transition period, which is undoubtedly an important practical feature of China's monetary policy at this stage.
Monetary policy is both a science and an art. Especially in the operation of monetary policy, there are a lot of strategic choices. In recent years, expectation management has become an important part of monetary policy.
The modern expectation management theory emphasizes the "how to say" and "what to say" of the central bank, so as to achieve the realm of "subduing the enemy without fighting". The effectiveness of monetary policy largely depends on the stability of market expectations. At the same time, the evolution and development of monetary policy is also a process of continuous innovation in theory and reality. For example, the traditional way of monetary policy operation is to regulate the short-term interest rate in the yield curve, but since the international financial crisis, the "distortion operation" of major central banks has actually strengthened the regulation of medium and long-term interest rates. Recently, China's central bank has made a series of innovations in monetary policy tools, which seems to include some "imprints" of medium - and long-term interest rate regulation. In addition, with the increasing importance of the capital market in the national economy, whether the monetary authority should go ahead to prevent the asset bubble from bursting or take some measures afterwards, the "dilemma" still haunts central banks of all countries, which is worth our re examination.
The current research on monetary policy is increasingly inseparable from the perspective of open economy, and the analysis framework of macroeconomic internal and external balance should be fully considered. Looking ahead, with the marketization of exchange rate and interest rate and the advancement of capital account convertibility, the rules (system) of China's monetary policy will continue to approach the corner solution of "impossible triangle". Recently, it is worth noting that the so-called "dualistic paradox" has been put forward internationally, that is, risk aversion leads to synchronous changes in the global risk premium, hinders the adjustment of interest rate differentials on exchange rates, and thus weakens the effectiveness of monetary policies in countries with floating exchange rates. In this case, the development of global financial integration has made it possible for emotions or panics originally confined to some central countries (such as the United States) to quickly spread to other international financial markets around the world. In addition, large-scale and frequent cross-border capital flows are also likely to lead to positive feedback cycles and cross sectoral risk contagion, becoming part of the pro cyclical and financial accelerator of the real economy. How to maintain the stability of the financial system and constantly optimize the macro prudential management of cross-border capital flows in an open economy is not only an important prerequisite for the effective transmission of monetary policy, but also the original intention of establishing the central bank in history.
After reading the whole book, I deeply felt that the reasoning process of researchers Wu Ge and Li Bin was rigorous, informative, full of wisdom and fun, and fascinating. It is not difficult to find that they both have many unique and profound understanding of the general laws of monetary theory and many problems of monetary policy transformation. Among them, they have given clear answers to many questions, and some may still be in the stage of raising questions, which is worth further exploration in the future. But I think that sometimes it is more important and interesting to ask questions than to find answers!
(The author is Deputy Director of the Office of the Central Leading Group for Finance and Economics and Vice President of the People's Bank of China)
Appendix II: This is the transcript of Yi Gang's speech at the Central Financial System Delegation Seminar on October 18, the 19th
Moderator: Welcome to our meeting (October 18). It's very hard for you to report on the 19th Metropolitan University. At the same time, I would like to thank friends from the media for their long-term attention and support to the financial system. Your reports and in-depth discussions on issues have played an important role in our financial system and work communication. Thank you, thank you.
According to the arrangement of the General Assembly, we will have a little time to answer questions from journalists at the final stage of today's meeting. Now let's begin our discussion. Everyone's speech today should be within ten minutes.
Speaker: Yi Gang, Vice President of the People's Bank of China
I am from the People's Bank of China. Yesterday, I heard the report of General Secretary Xi Jinping. I was deeply encouraged and excited. Here I want to talk about two experiences.
The first experience is to learn from Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era. We say that Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era inherits and develops Marxism, is the latest achievement of Marxism in China, and has opened up a new realm of Marxism in China. Therefore, it is the guideline for our whole party and the whole people to realize the great rejuvenation of the Chinese nation, and must be adhered to and developed continuously for a long time.
My experience in learning this is also gradually profound. Why is Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era our guide to action? First of all, it answers the most important questions and guides the construction of socialism with Chinese characteristics for a new era.
The first important question is, what kind of socialism with Chinese characteristics should we adhere to and develop in the new era?
The second question is how to adhere to and develop socialism with Chinese characteristics?
In Xi Jinping's Thought on Socialism with Chinese Characteristics for a New Era, the report uses eight explicit statements to elaborate on the guiding ideology. How can we build socialism with Chinese characteristics in the new era? What are the key points? In the report, among the eight clarifications, the general goal, general task, general layout and strategic layout of socialism with Chinese characteristics in the new era were clearly described. He analyzed from political, economic, social, cultural, ecological civilization and other aspects.
At the same time, it also made a profound analysis of the changes in the main contradictions of our society in the new era, and also made clear the goal and foreign policy of building a strong military. At the same time, it is also clear that the most essential feature of the socialist system with Chinese characteristics is the leadership of the Communist Party of China. Therefore, although these are very brief, they are of great significance for us to guide the thought of socialism with Chinese characteristics.
In his report, President Xi asked the whole party to have a deep understanding of the spiritual essence and rich connotation of socialism with Chinese characteristics in the new era, and summarized the new orientation of adhering to and developing socialism with Chinese characteristics in the new era with 14 insistences. So we really have a profound experience in our study. We must fully implement the Party's basic theory, basic line and basic strategy, and arm our minds (sound) and guide our actions with Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era. This is my first point of understanding. Let's talk about Xi Jinping's learning experience on Socialism with Chinese Characteristics for a New Era.
The second learning experience is that in the fifth part of General Secretary Xi's report, when talking about building a modern economic system and speeding up the improvement of the socialist market economic system, I mentioned on page 33 the improvement of the dual pillar regulatory framework of monetary policy and macro prudential policy. I would like to talk about my learning experience of this paragraph here.
We know that the two pillars refer to monetary policy and macro prudential policy. As we all know, before the current round of international financial crisis, the policy framework of the mainstream central bank was actually centered on monetary policy. The main goal of monetary policy is to stabilize prices as a feasible goal. When monetary policy takes stabilizing prices as its core goal, it actually plays a good role in controlling and preventing high inflation. However, the experience of this round of crisis shows that price stability is not equal to financial stability.
Before the subprime mortgage crisis and the Lehman crisis, and before the global financial crisis, the prices measured by CPI were actually stable, but the prices of financial assets rose sharply, and risks continued to accumulate. And the market behavior has obvious periodicity. The market is becoming more and more complex, and the market is easy to infect, so the financial crisis occurred. Therefore, through reflection on the financial crisis, everyone realized that monetary policy is not enough to maintain the stability of the financial system. The main source of financial system risk is financial pro cyclicality and cross market risk contagion. Macroprudential is the right medicine for financial pro cyclicality and cross market risk contagion. Therefore, in these practices, we proposed to improve the regulatory framework of the dual pillars of monetary policy and macro prudential policy, and let monetary policy and macro prudential policy as the dual pillars complement each other. One is to maintain the stability of the currency value. 2、 To maintain the stability of the entire financial system.
In fact, China started to explore and practice the combination of monetary policy and financial prudential policy earlier. In this regard, we have been constantly exploring.
On the one hand, we actively and prudently promoted the shift of monetary policy framework from quantitative regulation to price regulation, innovated a variety of monetary policy tools, and constantly strengthened interest rate regulation.
On the other hand, we also focus on building a macro prudential approach. Specifically, for example, what are the main contents of macro prudence? Macro prudence mainly includes the following contents. Let's take our practice as an example to explain.
One is that we formally introduced the dynamic adjustment mechanism of differential reserve in 2011, which requires the entire financial institutions to do as much business as they have the capital. Their expansion speed should be consistent with the requirements of economic development, and with how much capital they have, which is the most important content of macro prudential.
In 2016, we upgraded the dynamic adjustment mechanism of differential reserve to the macro prudential assessment system, that is, MPA, which is often heard in the media. In this way, more financial activities and financial asset expansion behaviors were included in the macro prudential management. We guided the behavior of financial institutions from seven aspects and implemented counter cyclical adjustment, which is one aspect, At the core of capital restraint, financial institutions should be restricted from seven aspects, requiring them to pay attention to risks.
The second aspect is that we pay special attention to cross-border capital flows, including cross-border capital flows, so as to carry out counter cyclical adjustment by means of open and transparent marketization, making the entire cross-border capital stable. This is the second aspect.
The third aspect is to continue to strengthen the macro prudential management of the real estate market. The core of the macro prudential management of the real estate market is the formation of a housing, financial and macro prudential framework with differentiated housing credit policies based on urban policies as the main content.
Through this practice, monetary policy combined with macro prudential policy has played a role in maintaining price stability and financial stability. After I explained this, let's finally learn the paragraph in General Secretary Xi's report on page 33 to have a deeper understanding. President Xi's words are to improve the dual pillar regulatory framework of monetary policy and macro prudential policy, deepen the market-oriented reform of interest rates and exchange rates, improve the financial supervision system, and hold the bottom line of avoiding systemic financial risks. I think this paragraph gives me important guidance. That's all. Thank you.
