The International Monetary Fund : An Evolving Role As A Monetary Policy Tool

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For the past 15 years, China has been in the limelight as one of the world’s fastest growing economy. The International Monetary Fund (2014) reported China’s average growth rate at an average of 10% over the past 30 years. The market economy of China is the world’s second largest economy by nominal GDP based on the World Bank Data. In spite of this fast growing economy, the country, like any developing country has experienced rough inflationary dynamics, and to target this, a mix of Monetary Policies have been adopted. Reserve Ratio Requirement (RRR) has an evolving role as a Monetary Policy tool to target these inflations. Ma, et al. (2011), presented that The People’s Bank of China (PBC) has actively changed its
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II. Inflation in the Recent Past

For the past decades, China has been in the limelight for inflationary episodes. Funke (2006) has compared this phenomenon as a “roller coaster ride”. But Girardin (2013) argues that there is a remarkable inflation performance over the past decade, in spite of the absence of explicit inflation targeting. This section shall focus on the inflations of the recent past of China. To contextualise this section, how inflation became a normal trend of China’s economy, the third, fourth and fifth phase of the economic reform of China shall be presented according to the study of Funke (2006). During the third (1988–1991) and fourth phase of economic reform (1992-1998), the reform process was characterized by lack of effective macroeconomic policy intruments. The effect was a substantial increase in inflation after price liberalisation. The fifth phase of economic reform (1998 to present) can be characterized by broad-based enterprise, financial and social reforms. Inspite the sound mix monetary policies of the People’s Bank of China, the fifth phase of economic reform apparently still have substantial inflation increase. Figure 1 shows inflation peaks for years 2004, 2007, 2008 and 2011 respectively.

Source: Author’s computation based on World Bank Data

In 2004, China’s annual rate of inflation hit a seven-year
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