When I joined the People’s Bank of China’s Monetary Policy Committee in April 2010, I knew I was unprepared, despite teaching economics for nearly 20 years in the US and Hong Kong. In fact, few people could have been prepared: China has a large and mixed economy and its institutions are still young. The financial crisis made my task harder still, since it exposed the deficiencies in traditional macroeconomic theories.
Following my term on the committee, I think I have learnt three fundamental lessons, which may be useful for those trying to understand how monetary policy is made, not least in China.
First, central bank independence is an unhelpful superstition. In theory, independence is a good defence against pressures from politicians facing re-election. The PBoC is under the control of the state council, and not run under by autonomous bank staff. This may suggest that Chinese officials are subject to strong political whims. Perhaps, but Chinese leaders often stay in office for as long as 10 years and are as concerned about their legacy as long-serving central bankers such as Alan Greenspan.