Conference Summary
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For two days we have had an intensive discussion of the experience of central banking. We have had four sessions: the first, on the role of monetary policy, the second, on implementing monetary policy, the third, on the role of supervision and regulation, and the fourth, on the structure and responsibilities of the central bank.

Richard D. Erb

For two days we have had an intensive discussion of the experience of central banking. We have had four sessions: the first, on the role of monetary policy, the second, on implementing monetary policy, the third, on the role of supervision and regulation, and the fourth, on the structure and responsibilities of the central bank.

Each session began with a presentation by the People’s Bank of China. Governor Li gave a presentation on the role of monetary policy; Deputy Governor Zhou spoke about the implementation of monetary policy; Deputy Governor Tong spoke of the role of supervision and regulation; and Deputy Governor Chen addressed the structure and responsibilities of the central bank. Each of those presentations provided a good starting point for the discussions. The presentations were then followed in each case by a presentation by Mr. Volcker, Mr. Mancera, and Mr. Godeaux. A give-and-take discussion then followed the formal presentations, which allowed an exchange of views. I would like to draw from some of the major issues that were discussed during the conference.

With respect to the question of what key objectives should guide economic policy and the role of the central bank in that context, everyone understood that every government faces multiple objectives. These include growth, development, full employment, external equilibrium, price stability, and an equitable income distribution. A key question for the meeting was in what way can the central bank contribute to the achievement of these objectives. It was agreed by our speakers that the best contribution a central bank can make is to assign priority to the achievement of price stability. By contributing to the achievement of price stability, the central bank is helping to lay the basis for prudent savings, investment, and exchange rate stability. All of these are seen as crucial to economic growth and development.

Another theme that came out of the discussions concerned the general environment within which monetary policy is set. Monetary policy implementation, and its success in achieving price stability in a country, depends importantly upon the structure of the economy and also on other economic policies. Some of the key structural factors mentioned included the degree of price and wage flexibility and the savings rate for the population as a whole. Among other government policies, fiscal policy was seen as especially crucial. Drawing on the experience of a wide range of countries, the conclusion was reached that excessive fiscal deficits can make the implementation of monetary policy much more difficult, by putting pressure on a central bank to finance the deficit directly or indirectly. In addition, experience indicates that fiscal deficits can crowd out other productive investments and lead to excessive foreign borrowing.

In looking at this relationship between monetary policy and fiscal policy, there was the view that the central bank and the finance ministry should be natural allies and that in dealing with overall economic conditions they should work together, particularly in resisting expenditure pressures from other government bodies. A third conclusion was that continuity in monetary policy was important. Indeed, continuity not only in monetary policies but also in other macroeconomic policies was seen as important.

What were referred to as stop-and-go cycles of expansion and contraction will weaken the confidence in government economic policies and undermine the climate for savings and productive investment. In this context, reference was made to the experience of many other countries, particularly in the 1970s, and the consequences of stop-and-go policies.

All of our 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. In many governments, there was the temptation to say that “a little bit more inflation may be okay if we get growth.” But as many governments found, particularly in the 1970s, yielding to that temptation led to accelerating inflation, and eventually growth prospects were undermined. It was also indicated that day-to-day decisions on monetary policy should be made within the context of a medium-term framework that is developed, for example, on an annual basis.

Yet another subject discussed in the conference concerned the role of the financial markets. The broadening and deepening of financial markets was seen as facilitating the implementation of monetary policy. In addition, the broadening and deepening of financial markets and the removal of obstacles to the development of 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 not directly involve itself in credit allocation. To the extent that a governmental role in credit allocation was deemed desirable, it should be accomplished through the budget and not through the central bank. There was a common view among our speakers that over time most credit would best be allocated by the market. But there are circumstances, of course, in which almost all governments seek to influence the direction of credit flows.

Another subject on which some interesting conclusions were developed concerned the role of regulation and supervision. There was broad consensus that regulation and supervision were essential for monetary policy and a healthy financial system. Supervision entails not only the enforcement of rules and regulations but also judgments concerning the soundness of the financial institutions’ assets, and judgments on the capital adequacy and the quality of the financial institutions’ management. The central bank has a strong interest in these matters and at a minimum should be responsible for the issue and implementation of all regulations dealing with monetary policy. Many countries favor the central banks, being responsible for prudential supervision also. But, as in some countries, if the central bank is not responsible for this aspect, it should at least have a strong presence in the supervisory process.

Finally, among some of the last major issues discussed, you will not be surprised to hear that, given its responsibilities, a central bank needs to be strong. What does this mean? It means that a central bank should be autonomous and thus not subject to orders from other government bodies. A central bank should not depend on a budget allocation but rather be financially independent. But autonomy does not mean that a central bank is not accountable. Accountability means that a central bank must be sensitive to the broad social, political, and economic environment within which monetary policy is set. Accountability means that a central bank must make every effort to explain its policy to other parts of the government and to the general public. Beyond the importance of autonomy and accountability, a strong central bank should have a high level of technical expertise and be professional and nonpartisan.

These are some of the highlights of the points that were made during the discussions. Of course, it is not possible in a brief summary to convey the full richness of the discussions and all the nuances and qualifications that one would associate with some of these conclusions, which are put more starkly.

Paul A. Volcker

Let me say from the perspective of a large developed country that has had to deal with many other countries around the world, financially as well as politically, in many different circumstances, that for a developing country, a strong central bank has considerable advantages as it more and more develops financial and economic relations with the rest of the world. By a strong central bank, I reiterate those factors that Mr. Erb mentioned: an organization respected for its professionalism, for its integrity, its nonpartisanship, and with a high degree of continuity. An organization of that sort becomes a trusted point of contact with other central banks, indeed, with other financial agencies around the world, with private bankers, and others. We like to think that international economic relations proceed smoothly all the time, but it is obvious they do not. Various problems arise—great uncertainty sometimes, financial disturbances, a certain amount of antagonism sometimes—between countries. History tells us this is inevitable.

One other point is that Mr. Erb has properly emphasized the emphasis we put on the central bank concerning itself with achieving reasonable price stability. In that connection, I think that we three visiting central bankers all speak from some experience. Experience not of perfection but of experience with, in varying degrees, serious inflation. We have found firsthand the difficulties that creates. I want to acknowledge that in emphasizing that point, we are speaking as much to ourselves as to you. My sense is that you have properly attached a lot of priority to restoring price stability, that your record over the years has been pretty good, by world standards, and that your very recent efforts over the past year or eighteen months have clearly borne fruit in restoring a high degree of stability.

I raise one question in that connection. We emphasized also the need for restoring more flexibility to the economy. That means among other things liberalizing and reforming the price system. We recognize that sometimes reform of the price system means more increases in prices in the short run than the kinds that create certain risks. You have a far better environment today, it seems to us, for dealing with questions of liberalization than when you were in the midst of strong inflationary pressures a year or two ago. There is some evidence that the overall price level is being stabilized.

Miguel Mancera

I would like to emphasize the importance of competition for the good functioning of a market economy. In the conclusions that were read by Mr. Erb, there was mention of competition. But I would like to point out that this is an element absolutely essential for the good working of a market economy. If competition is not present, and, instead, we have monopolistic or oligopolistic arrangements in industry, banking included, we cannot expect a market economy to work well. It is true that in very few instances in the world do we find what the textbooks call perfect competition. In this world nothing is perfect, but we should try to make things as perfect as possible, or as near perfect, and, in that sense, if you decide to have a part of your economy governed by market rules, it is essential that you foster competition as much as possible. If this condition is not met, you may be disappointed by the market economy.

Jean Godeaux

There is not much to add after the very balanced summary that has been made and the additional comments that my two colleagues have made. I should like to add the following.

It is a well-known fact of political science that the art of government is to reconcile objectives, desires, and interests that are multiple and cannot be all achieved at the same time. Economic policy is only part of the general policy. We therefore have to be aware that there are other considerations that are important and are outside the realm of economic policy. We know also that monetary policy to be effective can only be a part of a more general economic policy.

Some observations have been made that have universal validity. One is that price stability is not inimical to the other objectives of economic policy. On the contrary, experience in all sorts of countries has shown that one cannot durably “buy” growth by accepting to pay a price in terms of a higher rate of inflation. In industrial countries, in developing countries, in large countries, in small countries, everywhere, this observation has been made.

Another observation that has been made is that the importance of price stability and its contribution to the achievement of the other goals of economic policy is enhanced if one special institution is entrusted with monetary policy and is given the priority task of fostering price stability. Within this framework, useful lessons can be drawn from the observations that have been made. These observations permit lessons that are of general validity.

I should think that, as has been observed already, in the particular circumstances of China the conditions exist for pursuing this line of reasoning without excessive difficulty, even though we all know that nothing is easy. There are no painless policies and, as our American friends say, “there is no such thing as a free lunch.” Everything has a price. Monetary policy is neither easy nor painless. But it can be a powerful aid to good economic policies.

List of Participants

  • Chairman

    • Richard D. Erb

    • Deputy Managing Director

    • International Monetary Fund

  • Co-Chairmen

    • LI Guixian

    • Governor

    • People’s Bank of China

    • Roy D. Morey

    • Resident Representative

    • United Nations Development Programme

  • Speakers

    • Paul A. Volcker

    • Former Chairman of the Board of Governors of the Federal Reserve System

    • Miguel Mancera

    • Governor

    • Central Bank of Mexico

    • jean Godeaux

    • Former Governor

    • National Bank of Belgium

    • TONG Zengyin

    • Deputy Governor

    • People’s Bank of China

    • ZHOU Zhengqing

    • Deputy Governor

    • People’s Bank of China

    • CHEN Yuan

    • Deputy Governor

    • People’s Bank of China

  • Participants

    • AN Cheng Xin

    • Deputy Secretary General

    • General Office of the State Council

    • BAI Mei Qing

    • Deputy Secretary General

    • General Office of the State Council

    • BIAN Yao Wu

    • Vice Governor

    • Qinghai Province

    • CAI Ning Ling

    • Vice Minister of Materials

    • DAI Xiang Long

    • President

    • Bank of Communications

    • HAO Jian Xiu

    • Vice Chairman

    • State Planning Commission

    • HE Kang

    • Minister of Agriculture

    • HUANG Da

    • Vice President

    • People’s University of China

    • Jl Yun Shi

    • Vice Governor

    • Jiangsu Province

    • JIN Xin

    • General Director

    • State Administration of Taxation

    • LI Dao Yu

    • Assistant Minister of Foreign Affairs

    • LI Xiang Rui

    • Senior Advisor

    • Shanghai

    • LIU Sui Nian

    • Minister of Materials

    • LIU Hong Ru

    • Deputy General Director

    • State Commission for Restructuring the Economic Systems

    • LONG Yong Tu

    • Deputy Director

    • China International Economic and Technical Exchange Center

    • LU Pei Jian

    • Auditor General

    • Audit Administration of PRC

    • MA Hong

    • General Director

    • The State Council Development Research Center

    • MA Yong Wei

    • President

    • Agriculture Bank of China

    • QIN Dao Fu

    • General Manager

    • People’s Insurance Company of China

    • SHANG Ming

    • Special Adviser

    • People’s Bank of China

    • SHAO Zong Ming

    • Deputy Gernal Director

    • The State Statistics Bureau

    • SHEN Jue Ren

    • Vice Minister of Foreign Economic Relations and Trade

    • SUN Tong Chuan

    • Major

    • Chongqing

    • TANG Gen Yao

    • General Director

    • The State Administration of Foreign Exchange

    • WANG Chang Bai

    • Vice Minister of Agriculture

    • WANG De Yan

    • President

    • Bank of China

    • WANG Min Quan

    • Vice Mayor

    • Wuhan

    • XIANG Huai Cheng

    • Vice Minister of Finance

    • XU Zhao Long

    • Vice Chairman

    • China International Trust and Investment Corporation (CITIC)

    • YAN Yin

    • Deputy General Secretary

    • General Office of the State Council

    • ZHANG Hong Yi

    • Vice Mayor

    • Shenzhen

    • ZHANG Jian Min

    • Vice Mayor

    • Beijing

    • ZHANG Pan

    • Deputy General Director

    • The State Council Development Research Center

    • Zhang Qi

    • Deputy General Director

    • The State Price Bureau

    • ZHANG Sai

    • General Director

    • The State Statistics Bureau

    • ZHANG Shi Yao

    • Vice Minister of Commerce

    • ZHANG Xiao

    • President

    • Industrial and Commercial Bank of China

    • ZHENG Li

    • Deputy Auditor General

    • Audit Administration of PRC

    • ZHENG Tuo Bin

    • Minister of Foreign Economic Relations and Trade

    • ZHOU Dao Jiong

    • President Construction Bank of China

    • ZHU Jia Zhen

    • Vice Governor

    • Lioning Province

    • Linda M. Koenig

    • Senior Advisor

    • Asian Department Internatinal Monetary Fund

    • Gyorgy Szapary

    • Assistant Director

    • European Department

    • International Monetary Fund