China's Exchange Rate Policy And Monetary Policy Conflicts And Coordination

Since 2003, China's economy has become warm up. Meanwhile, there is a strong expectation of RMB appreciation in the world. Because of the loose capital control in our country, a large amount of foreign capital enters China's market for arbitrage. Since exchange rate regime in China is actually Pegging System, the central bank has to buy so large amount of foreign exchange that monetary base increases. And this reinforces the inflation pressure. The central bank is in a dilemma for the conflict between the monetary policy and the exchange rate policy. This thesis studies how to coordinate monetary policy and exchange rate policy, maintain the independence of monetary policy and improve the effectiveness of monetary policy.Chapter One gives the reason for the conflict between exchange rate policy and monetary policy using different theories. James Meade thinks that there will be a conflict between exchange rate policy and monetary policy when economy is in recession with the balance of payment in deficit, or in inflation with the balance of payment in surplus. According to Mendell—Fleming Model, no matter how violent international capital flows, the conflict between fixed exchange rate regimes and monetary policy will exist. The Incompatible triangle of Krugman shows that these three goals: fixed exchange rate regimes, free capital flow and the independence of monetary policy can not be attained at the same time.Chapter Two gives the reason for the conflict between exchange rate policy and monetary policy on our country's condition. First, this thesis reviews the history and features of China's exchange rate regimes from 1953 to 2005. Second, the thesis analyses the present situation of capital flow and comes to conclusion that there is less barrier to the international capital flow .Now economy globalisation is the main trend of the whole world. As the degree of financial market global integration deepens, it is...