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Great Leap Forward

Monetary and Fiscal Operations in China, An MMT Perspective

Here’s a piece I wrote with Yolanda Fernandez for the Asian Development Bank:

Monetary and Fiscal Operations in the People’s Republic of China: An Alternative View of the Options Available http://www.adb.org/publications/monetary-and-fiscal-operations-peoples-republic-china-alternative-view-options-available.

You’ve no doubt read various analyses predicting the impending collapse of the Chinese financial sector, and arguments that China cannot continue to grow at a rapid pace. While we do think that China faces some challenges, we part company with the gloom and doom crowd. What most of them do not understand is that China is a sovereign country that issues its own currency. Affordability is not an issue. China has the fiscal capacity to resolve any financial crisis, and it can “afford” to grow fast if it chooses to do so.

Our paper examines the fiscal and monetary policy options available to the PRC as a sovereign currency-issuing nation operating in a dollar standard world. The paper first summarizes a number of issues facing the PRC, including the possibility of slower growth and a number of domestic imbalances. Then, it analyzes current monetary and fiscal policy formation and examines some policy recommendations that have been advanced to deal with current areas of concern. The paper outlines the sovereign currency approach and uses it to analyze those concerns. Against this background, it is recommended that the central government’s fiscal stance should be gradually relaxed so that local government and corporate budgets can be tightened. By loosening the central government’s budget but tightening local government and corporate budgets at a measured pace, the PRC can avoid depressing growth or sparking excessive inflation. Since the central government faces no financial constraints, shifting more fiscal responsibility to the center will reduce financial fragility.

4 Responses to “Monetary and Fiscal Operations in China, An MMT Perspective”

Jean-Baptiste BOctober 28th, 2013 at 4:33 pm

Correct download link : http//www.adb.org/publications/monetary-and-fiscal-operations-peoples-republic-china-alternative-view-options-available

Looks very interesting. Thanks Mr Wray.

bootsaNovember 10th, 2013 at 5:37 am

About three weeks ago (see his October 16 Macrobit), Marshall Auerback evoked the possiblity of a consumption bust in China, given declining investment and total factor productivity in that country. I have most likely misunderstood, as there are certain similarities between your two posts, but if that is a possibility, how could a "gradual relaxation" of the central government’s fiscal stance be sufficient?

bootsaNovember 10th, 2013 at 6:02 am

Ok — now I have read the actual paper. Mostly makes sense to me. Your last sentence in it still makes me wonder: "By loosening the central government’s budget but tightening local government and corporate budgets at a measured pace, the PRC can avoid depressing growth or sparking excessive inflation." Are you actually arguing, not that one could actually AVOID a downturn in growth, just that the policies you recommend could moderate a likely downturn without sparking high inflation. You are still saying that things are going to get worse before they get better, no? With declining private investment, and lags in public investment (in essence a switch for a time from investment spending to consumption spending), that a significant downturn AND inflationary pressures are still likely, but that these can be moderated (but not avoided) if your policy prescriptions are followed?

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