China’s commitment to prop up its currency appears to be incompatible with its recent turn toward more accommodative monetary policies. The country will undoubtedly find it easier if it allows the renminbi to float sometime soon, rather than waiting until a full-fledged confidence crisis forces its hand.
CAMBRIDGE – As Chinese policymakers attempt to address what ails their country’s economy, they are pursuing two goals that will almost certainly turn out to be incompatible. Very seldom have central banks been able to maintain a fixed exchange rate over an extended period of time while providing liquidity to troubled banks and an ailing economy. Indeed, the task becomes especially difficult as the monetary stringency needed to prop up the currency intensifies strains on domestic banks and the real economy.
CAMBRIDGE – As Chinese policymakers attempt to address what ails their country’s economy, they are pursuing two goals that will almost certainly turn out to be incompatible. Very seldom have central banks been able to maintain a fixed exchange rate over an extended period of time while providing liquidity to troubled banks and an ailing economy. Indeed, the task becomes especially difficult as the monetary stringency needed to prop up the currency intensifies strains on domestic banks and the real economy.