China and Usa: a Comparison of Their Monetary Policies

Only available on StudyMode
  • Download(s) : 630
  • Published : March 30, 2010
Open Document
Text Preview
University of International Business and Economics

China and USA:
A comparison of their Monetary Policies.

Mid-term Project
School of International Trade and Economics

BY
Rebecca Bogiri
Professor: LIN GUIJIN

Beijing, China
2 December 2009

China and USA:
A comparison of their Monetary Policies.

By: Rebecca Bogiri

December 2009

Abstract

The monetary policies of USA and China is analyzed here from the perspective of their implementing bodies, their choice of instruments, and their means of setting their interest rates. The analysis reveals that there are immense differences between the two countries resulting from the nature and degree of influence from their respective domestic political systems. The paper concludes that China has a complex political economy that represents a hybrid of private ownership and state control. Therefore unlike the USA, its monetary policies are subject to political influence.

Keywords: Monetary policy; Monetary policy instruments; Balance Sheet; China; USA

Author’s email: becky.bogiri@gmail.com

ContentsPage

Abstract ………………………………………………………………………………….. 1

Introduction ……………………………………………………………………………… 3

USA Monetary Policy ……………………………………………………………………. 3

China Monetary Policy ………………………………………………………………….. 7

Comparison of China and USA’s monetary policies …………………………………… 9

Conclusion ………………………………………………………………………………. 10

References ……………………………………………………………………………….. 11

1. Introduction

Monetary Policy is the process by which the government, central bank, or monetary authority of a country controls (1) the supply of money, (2) the availability of money, and (3) the interest rate, in order to attain a set of objectives oriented towards the growth and stability of the economy.

This paper refers the above theme to two countries: China and USA. As such, there are three broad objectives. The first is to discuss monetary policy generally as carried out in the USA. The second is to discuss monetary policy generally as it is carried out in China. The third is to compare and analyze the way monetary policy is implemented in the two countries.

2. USA Monetary Policy

How is the Federal Reserve structured?
The Federal Reserve System (called the Fed, for short) is the nation's central bank. It was established by the Federal Reserve Act[1] and consists of the Board of Governors in Washington, D.C., and twelve Federal Reserve District Banks. The Congress structured the Fed to be independent within the government. Therefore although the Fed is accountable to the Congress and its goals are set by law, its conduct of monetary policy is insulated from day-to-day political pressures. This reflects the conviction that the people who control the country's money supply should be independent of the people who frame the government's spending decisions. What makes the Fed independent?

Three structural features give the Fed independence in its conduct of monetary policy: the appointment procedure for Governors, the appointment procedure for Reserve Bank Presidents, and funding. Appointment procedure for Governors: The seven Governors on the Federal Reserve Board are appointed by the President of the United States and confirmed by the Senate. Independence derives from a couple of factors: first, the appointments are staggered to reduce the chance that a single U.S. President could "load" the Board with appointees; second, their terms of office are 14 years--much longer than elected officials' terms. Appointment procedure for Reserve Bank Presidents: Each Reserve Bank President is appointed to a five-year term by that Bank's Board of Directors, subject to final approval by the Board of Governors. This procedure adds to independence because the Directors of each Reserve Bank are not chosen by politicians but are selected to provide a cross-section of interests within the region, including those of depository institutions, nonfinancial businesses,...
tracking img