Front Matter

Front Matter

Miguel Mancera, Paul Volcker, and Jean Godeaux
Published Date:
June 1991
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    Proceedings of a conference held in Beijing, China, January 5-7, 1990

    People’s Bank of China

    International Monetary Fund

    United Nations Development Programme

    Washington, D.C., 1991

    © 1991 International Monetary Fund Cover design by IMF Graphics Section

    Cataloging-in-Publication Data

    Perspectives on the role of central bank / Paul A. Volcker, Miguel Mancera, Jean Godeaux [speakers].—Washington, D.C.: International Monetary Fund, 1991.

    p.; cm.

    Proceedings of a conference held in Beijing, China, January 5-7, 1990.

    Jointly sponsored by: People’s Bank of China, International Monetary Fund, and United Nations Development Programme.

    ISBN 9781557752062

    1. Banks and banking. Central — Congresses. 2. Monetary policy—Congresses. I. Volcker, Paul A. II. Mancera, Miguel. III. Godeaux, Jean.

    HG1811.P47 1991

    Price: US$12.50

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    The International Conference on Central Banking, jointly sponsored by the People’s Bank of China (PBC), the International Monetary Fund (IMF), and the United Nations Development Programme (UNDP), was held at the Diaoyutai State Guesthouse in Beijing, China on January 15-17, 1990. The conference was chaired by Richard D. Erb, Deputy Managing Director of the IMF, and co-chaired by Li Guixian, State Councillor and Governor of the PBC, and Roy D. Morey, Resident Representative, UNDP. Opening remarks were given by Mr. Erb, Governor Li, and Mr. Morey, and at each session presentations were made by a representative of the People’s Bank of China as well as by Paul A. Volcker, former Chairman of the Board of Governors of the U.S. Federal Reserve System, Miguel Mancera, Governor of the Bank of Mexico, and jean Godeaux, former Governor of the National Bank of Belgium and former President of the Bank for International Settlements. At the end of each session, Mr. Erb gave a summing up of the discussion.

    The conference was attended by over forty senior Chinese government officials and academics from the State Planning Commission, the State Commission for Restructuring the Economic System, the State Council Development Research Center, the Ministry of Foreign Affairs, the Ministry of Finance, the Ministry of Foreign Economic Relations and Trade, the Ministry of Materials, the Ministry of Commerce, the Ministry of Agriculture, the State Audit Administration, the State Statistics Bureau, the State Price Bureau, the State Administration of Taxation, the specialized banks, the provinces of Guangdong, Jiangsu, Lia-oning, Qinghai, and the municipalities of Beijing, Shanghai, Shenzhen, Wuhan, and Chongqing.

    The purpose of the conference was to invite leading central bankers from different parts of the world to discuss their experiences with various aspects of central banking with senior Chinese government officials. The main issues were the role of monetary policy in macro-economic management, its formulation and implementation, the role of central banks in the supervision and regulation of the financial system, and the internal structure and responsibilities of central banks.

    The book is compiled from speeches made at the conference and is jointly published, both in Chinese and English, by the PBC, the IMF, and the UNDP.


    This book presents the proceedings of a conference on the role of central banks held in Beijing, China, in January 1990. The purpose of the conference was to bring to China the experience of central banks in other countries. Three distinguished and experienced central bankers were invited: Paul A. Volcker, former Chairman of the Board of Governors of the U.S. Federal Reserve System, Miguel Mancera, Governor of the Bank of Mexico, and Jean Godeaux, former Governor of the Bank for International Settlements. To set a context for the discussion from the perspective of China’s experience, senior officials from the People’s Bank of China also gave presentations. Given the breadth, depth, and diversity of experience reflected in each of their presentations and the relevance of that experience to other countries, it was decided to publish the proceedings.

    China is not alone in its interest in central banking. In recent years, because of concerns about persistent inflation, as well as concerns about the safety and soundness of banking systems, many industrial and developing countries have been examining the role of their central banks. These examinations reflect a renewed awareness of the significant impact central bank policies and decisions can have on economic performance. In addition, many countries implementing economic reforms have taken steps to strengthen their central banks.

    The International Monetary Fund (IMF), conceived more than four decades earlier, stands as the institution of the world most closely associated with the central banks of its growing membership. The evolution and role of the IMF has enabled it to identify with and support the process of developing effective central banks in countries undergoing economic reform. This conference is but one example of the many ways the IMF plays this role, but, more generally, the entire activities of the IMF are directed toward promoting economic growth with stability in a framework of international cooperation. Central banks are key institutions in this process.

    Richard D. Erb

    Deputy Managing Director

    international Monetary Fund


    The success of the International Conference on Central Banking, held in Beijing, China in January 1990, is due to the mutual efforts of Gyorgy Szapary and Linda M. Koenig, of the International Monetary Fund, Governor Li Guixian, of the People’s Bank of China, and Roy D. Morey, of the United Nations Development Programme, all of whom carefully nurtured the idea of such a conference into reality.

    My sincere thanks go also to Dai Qianding, Executive Director, and Zhang Zhixiang, Alternate Executive Director, for their untiring assistance and advice, to the many translators at the conference who ably provided simultaneous translation, and to Juanita Roushdy, of the External Relations Department of the IMF, who edited the proceedings.

    Richard D. Erb

    Deputy Managing Director

    International Monetary Fund


    A conference, jointly sponsored by the People’s Bank of China, the International Monetary Fund, and the United Nations Development Programme was held in Beijing on January 15-17, 1990.

    The following are some of the most important points made at the conference by the guest central bankers. During their presentations, and the discussions, the guest central bankers drew on their own experiences as well as their knowledge of developments in a broad range of countries.

    Key Objectives of Economic Policy and Role of the Central Bank

    It was agreed that every government faces multiple objectives. Among these are growth, development, full employment, external equilibrium, price stability, and equitable income distribution. The key question for the meeting was in what way the central bank can best contribute to the achievement of these objectives. All agreed that the central bank should assign priority to the achievement of price stability, as this is a necessary condition for maintaining high saving and investment, exchange rate stability, and good longer-range planning—all of which are crucial to economic growth and development, whatever the particular mix of central direction and market regulation.

    Importance of Other Policy Issues to the Effectiveness of Monetary Policy

    Monetary policy implementation and its success in achieving price stability in every country depend importantly upon the structure of the economy, and on other economic policies. Some of the key structural factors mentioned included the degree of price and wage flexibility and the rate of saving. For example, price and wage flexibility were seen as essential if reliance is to be placed on greater market regulation. Among other government policies, fiscal policy is especially important. As indicated by the experience of many developing and developed countries, excessive fiscal deficits can make the implementation of monetary policy much more difficult by putting pressure on the central bank to finance the deficit directly, where that is permitted, or indirectly, by inducing other financial institutions to do so. In addition, the financing of fiscal deficits can mean fewer resources for other productive investments in industry, agriculture, and other sectors, and lead to excessive foreign borrowing. The central bank and finance ministry should be natural allies on overall economic issues, particularly in resisting the expenditure pressures from other government bodies. A good working relation does not preclude that there will at times be differences on particular issues as each pursues its primary responsibilities.

    Continuity in Monetary Policy

    Drawing on the experience of many countries, particularly the experience during the 1970s, it was concluded that it is extremely important that governments pursue continuity in monetary and other macroeconomic policies, striving to avoid extremes of “boom or bust.” Stop-and-go cycles of expansion and contraction weaken the confidence in government economic policies and undermine the climate for saving and productive investment. All the speakers agreed that a stable environment was the most conducive to economic growth; theories to the effect that inflation and growth go hand in hand have not been borne out in practice. To achieve more continuity, it helps to make day-to-day decisions on monetary policy within a medium-term framework. These decisions on monetary policy will be assisted by close attention to growth in various measures of the money supply and to developments in the exchange market and external reserves.

    Development of a Strong Financial Market

    Broadening and deepening of financial markets and encouraging competition among financial institutions were seen as facilitating the implementation of monetary policy. In addition, the removal of obstacles to the full development of financial institutions and competition among financial intermediaries contribute to the allocation of credit to the most productive uses. There was a strong view that the central bank should avoid directly involving itself in credit allocation. To the extent that a governmental role in credit allocation was deemed desirable, this should be accomplished through the budget and other means, and not through the central bank. This is accomplished in some countries through budget support of development banks or other forms of budget-supported finance.

    The Role of Regulation and Supervision

    The experience of many countries indicates that regulation and supervision are essential for a stable and healthy financial system and that the needs become greater as the number and variety of financial institutions increase. Supervision entails not only the enforcement of rules and regulations, but also judgments concerning the soundness of a financial institution’s assets, its capital adequacy, and its management. The central bank has an interest in these matters. Many countries favor giving the central bank primary responsibility for prudential regulation and supervision; also, if the central bank is not primarily responsible, it at least must have a strong presence in the supervisory process and have full authority for regulations dealing with monetary policy. Supervision and regulation are also used to encourage the development of, and efficiency in, financial intermediation, for example, by encouraging competition.

    Importance of a Strong and Autonomous Central Bank

    Given its responsibilities, a central bank needs to be strong. Many factors that influence the strength of a central bank were discussed. Strong central banks have a high level of integrity and technical expertise and are professional and nonpartisan in the conduct of their responsibilities. Central bank autonomy is also desirable. This means not being subject to orders from other government departments, such as the finance ministry, and also having financial independence. Autonomy does not mean that a central bank is not accountable. For example, a central bank needs to be sensitive to the broad social, political, and economic environment within which monetary policy is set, and an effective central bank makes every effort to explain its policy to other parts of the government and to the general public. A central bank and finance ministry ideally should work together in confidence, but without decisions being imposed on the central bank.

    Opening Remarks

    Richard D. Erb

    This International Conference on Central Banking is jointly sponsored by the International Monetary Fund, the People’s Bank of China, and the United Nations Development Programme (UNDP). As many of you know, the International Monetary Fund (IMF) is a cooperative organization, with 152 member countries at present. The membership is diverse not only in size and stage of development but also with respect to economic, social, and political structures. All of the members of the IMF, however, share a common set of objectives. These objectives, which are stated in the Fund’s Articles of Agreement, include growth of output and employment, price stability, and an open and growing international payments and trade system.

    The members of the IMF cooperate with each other in pursuit of these objectives in a variety of ways. I will not try to describe all of them, but one that I would like to emphasize is the way that members exchange information and analysis on each other’s economy in the context of regular consultations with IMF staff and the IMF Executive Board. For example, members have been able to observe and discuss the developments in China over the past decade. I can report to you that members of the IMF have great respect and admiration for what China has been able to accomplish over the past decade in implementing economic reforms. China, through its economic reforms, including steps to open the economy to world trade and world capital, has been able to achieve, by comparison with many other nations, an outstanding rate of economic growth.

    I can also report to you that, from my perspective at the International Monetary Fund, the recent years have been extremely dynamic for all of the world economy. Within the major industrial countries—including the United States, the European countries, Japan—economies have been undergoing significant changes and governments have been working to implement policies to achieve growth with price stability. Many of the debtor countries have been implementing economic reforms to deal with their external debt problems and to lay the basis for sustained economic growth.

    Many other economies in this region, for example, Viet Nam and the Lao People’s Democratic Republic, are also implementing major economic reforms. We see economic changes taking place in countries like Hungary and Poland and in Africa, in countries like Tanzania, Mozambique, Nigeria, and Angola. This is a time of dramatic economic change, but the changes that are taking place throughout the world have not been without difficulty. Inflation in many countries has been difficult to bring under control. This has also been an issue of concern within China, and this brings me to the subject of today’s conference.

    Members of the IMF recognize that to achieve economic growth on a sustained basis over time, it is necessary also to achieve stable financial and noninflationary conditions. This leads all of us to focus great attention on the role that central banks play in promoting the conditions for economic growth and stability. The subjects on the agenda for this conference are being discussed in many countries. I can report to you that many countries have been looking at ways to strengthen their economic policy-making and, particularly, to strengthen the role of their central banks, in order to improve prospects for growth and price stability.

    Countries like New Zealand, Chile, Hungary, Yugoslavia, and Turkey have all been implementing reforms in their banking systems and within their central banks. In those countries where central banks are not going through major structural changes, a great deal of attention is being paid to the question of how to achieve greater financial and price stability. This conference brings to you the perspectives of central bankers from different economies.

    Mr. Volcker, Mr. Mancera, and Mr. Godeaux come from very different economies, economies that have also been pursuing the objectives of achieving stable economic growth and reasonable price stability. These are men who have demonstrated an ability to bring inflation down. You will be hearing from men who have fought the war and have succeeded in achieving their objectives. I am sure that during the course of the discussion they will have, at times, different perspectives on the issues that are before us today. I am sure that each of you will have questions or comments or suggestions and that through them we can establish, during the course of the next two days, a dialogue that will enable each of us to share views on how to achieve the objectives of growth and stability.

    Li Guixian

    At the outset please allow me, on behalf of the People’s Bank of China and the Chinese participants, to extend a warm welcome to friends who have come a long way to be with us, and to express our heartfelt thanks to the International Monetary Fund and the United Nations Development Program who have spared no effort in actively promoting and working toward the opening of the conference.

    The conference is being held at a time when we have just bade farewell to 1989 and are ready to embrace the first spring of the 1990s. Over the past twelve months—owing to the timely implementation of stabilization policies by the Chinese authorities—the overheating of the economy and the inflation plaguing the economy in recent years have been held under initial control, and the imbalance between aggregate supply and aggregate demand has eased somewhat. Progress has also been made in other parts of the economy. The initial results gained through the policy of stabilization and the deepening of economic reform will further enhance our confidence in the overall achievement of stable economic growth. We have come to the realization that, in order to maintain a sustained and coordinated growth, efforts need to be made to coordinate every aspect of economic policy. And, among other factors, the monetary policy of the central bank must be accorded a relevant weight. With the deepening of the economic reform in China, a monetary policy with new meaning and vitality has evolved. In this context, only when the functions of the central bank are strengthened will the central bank be able to gradually play an effective rote in regulating the macroeconomy. The 1990s will be a key decade for China to fulfill its economic development strategy; it will also be a decade full of hope and challenge. The year 1990, itself, will be critical for us to attain our overall goal of stabilization. During the course of the new year, not only will we continue our efforts to combat inflation, but we will also endeavor to achieve a proper rate of growth for the economy, thereby paving the way for further reform and opening in a solid manner and enabling the economy to develop in a sustained and coordinated fashion.

    For these reasons, we wish to learn from and refer to experiences of various nations. We feel honored to have central bankers of world renown participating in this conference. They have amassed and are still amassing an extremely rich body of experience and skill in the course of tackling some difficult economic problems of a nationwide and worldwide nature. Needless to say, it seems that operating monetary policy is more of an art than a skill! The experience these central bankers possess covers a wide and varied representation. Therefore, we look forward at this conference to sharing the many-faceted aspects of their knowledge and experience. It is my belief that the conference will play a positive role in strengthening the functions of the People’s Bank of China, the central bank of China, in macroeconomic regulation and, at the same time, will contribute toward enhancing friendly cooperation between the People’s Bank of China and the International Monetary Fund, the United Nations Development Programme, as well as the central banks of various nations.

    Finally, I would like to express my best wishes for a successful conference.

    Roy D. Morey

    On behalf of the United Nations Development Programme (UNDP), I am very pleased to welcome you here to this International Conference on Central Banking. This meeting has generated considerable interest since 1988. At that time, China decided to host this conference, and the International Monetary Fund (IMF) and the UNDP joined in partnership to organize and cosponsor the event.

    The conference brings together an exceptional group: it includes both the distinguished individuals here today and other Chinese leaders who will be involved in consultations during the week. We are delighted that Messrs. Erb, Volcker, Mancera, and Godeaux have agreed to share their valuable time and experience with us. Additionally, I want to sincerely thank the People’s Bank of China (PBC) and the Government of China for not only hosting this meeting but also for the extraordinary efforts, support, and senior-level attention that has been given to assure the success of these consultations.

    To my mind, this international conference is an example of the Chinese Government’s commitment to maintain its open-door policy and to pursue opportunities in accord with its policy to deepen economic and structural reforms.

    In recent months, the leadership of the Government of China has stated its overall economic objectives, namely, China seeks to achieve more stable, sustained, and harmonious economic growth and development. These are worthy goals. Moreover, these goals are common to many other countries that in recent years have faced similar swings of the economic cycle, trade and budget deficits, imbalances in the exchange rate, and high inflation. In fact, our distinguished foreign guests have made their international reputations by successfully dealing with these economic problems and the challenges of economic uncertainty and instability.

    It is not surprising that during our briefings by senior government officials, great interest was shown in receiving advice about preventing a return to inflation and the instruments to stimulate consumption and balanced production. No matter when this meeting would be convened, one preoccupation would be to examine the policy options and instruments for the formulation and implementation of monetary policies and strategies. Our conference is intended to meet the desire to consult about such policy issues and also to lead to an examination of the monetary system, institutions, and capabilities that are necessary in order to achieve China’s economic goals. Even if potentially effective short-term policy prescriptions are identified and implemented, experience has shown that systemic problems will jeopardize their success.

    As our agenda directs us toward the examination of systemic problems and solutions, I wish to make three points. First, major decisions with respect to monetary policy and banking necessitate transition through three stages: (1) the identification and elaboration of options; (2) the formulation of policies and their action plans; and (3) implementation and feedback.

    Second, in each of these stages, effective management and effective systems are prerequisites for successful action. These include (1) the availability of adequate quantitative data and information; (2) competent analysts and managers capable of utilizing the data and information; (3) systems to channel the data that will facilitate a two-way flow of information so that it can be shared among policymakers, as well as managers who are responsible for implementing monetary policy; and (4) effective monitoring and feedback systems for constant policy adjustment.

    In short, the type, volume, flow, and utilization of information are critical. This is especially important so that China (or any other country) can avoid sudden or extreme shifts in policy that result in drastic swings in production, prices, and consumption.

    Third, for many functions in the policy process, information must be shared. Systematic and continuous consultation must occur, to assure both the vertical harmony and cooperation (such as between central and branch bank offices) and horizontal policy coordination among the various central institutions (such as China’s major banks and the Ministry of Finance). Top-quality human resources, institutional capacity, and effective systems are therefore necessary components of successful monetary and banking policy-making. In recognition of this fact, the UNDP has been providing technical assistance to the People’s Bank of China and a large number of other ministries and institutions represented here at the conference. We have every intention of continuing to provide additional assistance in the future. Your deliberations this week will be useful in identifying such needs.

    This conference represents a new collaborative relationship between the UNDP and the IMF in China. In looking ahead at China’s future needs, we would be pleased to see this partnership strengthened.

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