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Monetary Policy in China and Egypt: Can Egypt Play the Chinese Game?
Abstract
Despite the similarity between the Chinese and Egyptian monetary policies, the outcomes of the policies are profoundly diverse. China's inflation rate was always lower than Egypt's, while its growth rate totally surpassed it. This study attempts first, to compare the monetary policy transmission mechanisms in China and Egypt; second, to evaluate Egypt's readiness to replicate the Chinese paradigm by examining the main monetary policy instruments responsible for China's relatively low inflation and high growth. The paper uses Granger causality tests, a variance autoregressive (VAR) model, impulse response functions (IRF) and variance error decomposition (VDC) analyses to test for the main monetary policy instruments affecting growth and inflation in China and Egypt. Results prove that in the short run, replicating China's policy in Egypt would not be fruitful to Egypt. IRFs have shown that appreciation of the yuan immediately slows down growth, while appreciation of the Egyptian pound increases GDP for two years before it starts decreasing again. Increasing the interest rate decreases growth in China and Egypt as well; but the effect of interest rate on output is much weaker in China than in Egypt. However, the Chinese paradigm, focusing on low exchange and interest rates, may be may be fruitful in Egypt if the long run effect is targeted, since such policy would boost output without significantly affecting inflation. With respect to inflation, results indicate that the interest rate as a monetary policy transmission mechanism is weak in both countries. The exchange rate in China was still the most dominant factor affecting prices, while in Egypt both the exchange rate and interest rate contributions to price changes were modest. If the significance of interest rate as a monetary policy transmission mechanism in Egypt is weak in affecting inflation but crucial in influencing growth, then probably the growth target rather than the inflation target, should receive priority by Egyptian policy makers when shaping this policy instrument.
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The paper formulates a nesting model for studying the theoretical literature on inflation and endogenous growth. It analyses different classes of endogenous growth models, with different usage of physical and human capital, with different exchange technologies. First, the paper shows that a broad array of models can all generate significant negative effects of inflation on growth. Second, it shows that these models can be differentiated primarily by the fact whether there is a Tobin-type effect of inflation and also whether the inflation-growth effect becomes weaker as the inflation rate rises, a non-linearity, or stays essentially constant over the range of inflation rates. The paper compares these features of the models to empirical evidence as a way to summarize the efficacy of the models. Copyright Blackwell Publishers Ltd, 2005.
A pegged exchange rate regime has been pivotal to China's export-led development strategy. However, its huge trade surpluses and massive build up of international reserves have been matched by large deficits for major trading partners, creating acute policy concerns abroad, especially in the USA. This paper provides a straightforward conceptual framework for interpreting the effect of China's exchange rate policy on its own trade balance and that of trading partners in the context of discrepant economic growth rates. It shows how pegging the exchange rate when output is outstripping expenditure induces China's trade surpluses and counterpart deficits for its trading partners. An important corollary is that given its strictly regulated capital account, China's persistently large surpluses imply a significantly undervalued renminbi, which should gradually become more flexible. Copyright 2007 Institute of World Economics and Politics, Chinese Academy of Social Sciences.
In its 2005 Report to Congress, the U.S.-China Economic and Security Review Commission—also known as the U.S.-China Com-mission (USCC)—recommended that China appreciate its currency, the renminbi (RMB), "by at least 25 percent against the U.S. dollar" or face "an immediate, across-the-board tariff on Chinese imports." The commission argued that such an action could be justified under Article XXI of the World Trade Organization (WTO), "which allows members to take necessary actions to protect their national security." The key idea behind the commission's protectionist policy stance is that "China's undervalued currency has contributed to a loss of U.S. manufacturing, which is a national security concern" (USCC 2005: 14). There is no doubt that financial repression in China has led to an undervalued currency, but that in itself does not pose a national security risk to the United States. Workers in U.S. manufacturing lose their jobs for many reasons. Blaming China for displacing American textile workers, for example, and thereby jeopardizing our national security is rather farfetched, to say the least. Moreover, U.S. manu-facturing output has been increasing as American workers become more productive (Griswold 2006: 12). When China hawks and protectionists on Capitol Hill join forces, as they did to defeat CNOOC's acquisition of Unocal in the summer of 2005, a dangerous precedent is established that threatens the future of a liberal global economic order and undermines a constructive U.S.-China policy of engagement (Dorn 2005). Although it is proper to criticize China for its human rights violations and its lack of a 425 transparent legal system, we should not ignore the substantial prog-ress China has made since it embarked on economic liberalization in 1978. U.S. economic security, as well as China's, will depend on promoting economic liberalism, rather than fostering protectionism. In this article, I first address four major questions posed by the USCC at its August 22, 2006, hearing on "China's Financial System and Monetary Policies," and then elaborate on those questions by considering China's repressed financial system, the case for economic liberalism, and the politics of China's economic reform movement.
We study the effects of Chinese monetary policy shocks on China's major trading partners in East and South-East Asia by estimating structural vector autoregressive (SVAR) models for six economies in the region. We find that a monetary expansion in Mainland China leads to an increase in real GDP (temporary) and the price level (permanent) in a number of economies in our sample, most notably in Hong Kong and the Philippines. The impact could result from intertemporal substitution present in a general equilibrium framework, which allows for positive domestic impacts of foreign monetary expansions. Our results emphasize the growing importance of China for its neighbouring economies and the significance of Chinese shocks for the design of monetary policy in Asian economies.
Using adjusted foreign reserves as a proxy for exchange rate intervention by the government, we estimate China's actual exchange rate as a function of (1) the inflation differential, (2) the long-run movement of the real exchange rate, and (3) government intervention. After the estimating of the actual exchange rate, assuming no change in intervention and using the estimated coefficients, we estimate the long-run nominal exchange rate without government intervention. The estimation results indicate that the exchange rate of the RMB against the U.S. dollar is slightly undervalued and would have appreciated by 15–22% in 2003 compared with 1996, if there were no government intervention.
This study examines the conduct of monetary policy and the setting of deposit and lending rates in China. As China is still in the transitional stage from a centrally planned economy to a market economy, State-Owned Enterprises and banks are being restructured and financial markets are being developed. Our findings show that there is a long-term relationship between interest rates and inflation, but the relationship is weak. In the short run, the central bank adjusts deposit and lending rates downward faster than they adjust them upwards. The weak long-term relationship reflects the fact that the interest rate as a tool of monetary policy is rather ineffective in China and the asymmetric adjustment speed shows that interest rates are kept deliberately below their equilibrium levels for the state-sponsored objective of stimulating economic growth, creating jobs and maintaining financial stability.
This paper investigates the effectiveness monetary policy by Granger causality tests in the two regimes of inflation and deflation, respectively. The surplus lag rolling estimation is applied to deal with the problem of the frequent structural changes in the Chinese monetary system. We found that the monetary policies have become less effective in stabilizing the price level in the deflation era that started from 1998. There is also empirical evidence to suggest that money was endogenous in China during the inflation period. This implies that the People's Bank of China had difficulty exercising the power of money supply to reduce inflation if the endogeneity was the result of the market behaviour. However, if the endogeneity was due to the government inflation-targeting rule, then there is no evidence to suggest that this rule has been effective for M0, M1 and M2 instruments, except for the M0 instrument during the inflation period of April 1990 to March 1995. Although it was found that money ceased to be endogenous in the deflation periods, it does not support the proposal of utilizing the money supply as a policy instrument, as we found that money is impotent in influencing price in the deflation regime. Our findings provide some empirical evidence to support the Chinese government adopting alternative policy instruments such as an active fiscal policy in the era of deflation.
This article uses an open economy model to estimate, using cointegration and error-correction analysis, China's monetary policy reaction function for the period 1993 to 2003. Alternative inflation-forecast-based (IFB) policy Taylor-type rules for the interest rate are examined and their parameters are estimated. The empirical results support the hypothesis that the central bank of China follows a Taylor-type rule for the interest rate, with the aim of inflation targeting and output smoothing.
This paper presents new nonlinear regression estimates of the relationship between inflation and economic growth for 80 countries over the 1961- 2000 period, using middle-income and low-income countries. We also consider the four separate decades between 1961 and 2000. The paper consistently finds that higher inflation is associated with moderate gains in gross domestic product growth up to a roughly 15-18 percent inflation threshold. However, the findings diverge when we divide our full data set according to income levels. With the groupings by decade, the results indicate that inflation and growth will be more highly correlated to the degree that macroeconomic policy is focused on demand management as a stimulus to growth. We consider the implications of these findings for the conduct of monetary policy. One conclusion is that there is no justification for inflation-targeting policies as they are currently being practiced throughout the middle- and low-income countries, that is, to maintain inflation with a 3-5 percent band.
This paper analyses China's economic performance in the last 25 years and discusses its prospect for growth in the future. Exports and investment have been the two driving forces for the high annual GDP growth rates. FDI plays an important role. However, structural issues such as the loss-making state-owned firms and the fragile banking industry have to be solved. Monetary policy is complicated by the accumulation of reserves which, however, provide an insurance for the fragile banking system. Property rights, a crucial element in transforming a communist society, are far from being clearly developed. Major policy issues in the future include the correction of the distorted growth process and of the institutional deficits, especially with respect to the rule of law and the lack of democracy. Copyright 2007 The Author
Journal compilation 2007 Blackwell Publishing Ltd .
The world economy is currently suffering a global financial and economic crisis that has become severe since the second half of 2008. This global financial situation was triggered by?the advent of the subprime mortgage crisis in the United States that became apparent in mid-2007.?Europe was the first area affected, thereafter its contagion spread to the rest of the world. East Asia?did not escape. The nature of the current global financial crisis is unprecedented in terms of (1) the?scale of the problems in the financial sector (particularly in the United States and Europe), (2) the?depth and speed of contagion worldwide (through financial sector and trade linkages), and (3) the?severity of the recession (particularly in emerging market economics, small countries, and East?Asia). This paper analyzes, mainly, cross-border capital movements by looking at the pre-crisis?features of the United States as the crisis hypocenter and its relationships with other countries.?Detailed observations are presented on cross-border investment in stocks and debt securities, as well?as banking activities. The paper then sheds light on the impact of the subprime mortgage crisis on?cross-border capital movements in the United States, the United Kingdom, and East Asia. Other?performance indicators such as exchange rates, economic growth and international trade are also?discussed in the case of East Asia. The paper examines several challenges posed for East Asia by?the crisis.
The aim of this paper is to empirically investigate the sources of inflation in Egypt. For this, price dynamics is herein represented by a vector error-correction model, which we use to test for the existence of a long-run relationship between the consumer price index, real gross domestic product (GDP), the exchange rate, interest rate, money supply and world prices. Then using the augmented VAR approach, we test for Granger non-causality between the different variables and inflation. The main results that are of interest to monetary policy in Egypt suggest that structural reforms based on improving the country's productive capacity, shrinking the budget deficit and credit to the government, are crucial for controlling inflation.