Abstract
This paper examines the fiscal and monetary policy options available to the People’s Republic of China (PRC) as a sovereign currency-issuing nation operating in a dollar standard world. The paper first summarizes a number of issues facing the PRC, including the possibility of slower growth and a number of domestic imbalances. Then, it analyzes current monetary and fiscal policy formation and examines some policy recommendations that have been advanced to deal with current areas of concern. The paper outlines the sovereign currency approach and uses it to analyze those concerns. Against this background, it is recommended that the central government’s fiscal stance should be gradually relaxed so that local government and corporate budgets can be tightened. By loosening the central government’s budget but tightening local government and corporate budgets at a measured pace, the PRC can avoid depressing growth or sparking excessive inflation.
Highlights
This working paper addresses the fiscal and monetary policy options that are open to the People’s Republic of China (PRC) as a sovereign currency-issuing nation
This paper explores the policy space already available to the PRC as a sovereign currency-issuer concluding that the nation has the fiscal capacity to continue to pursue economic growth at a pace consistent with its development objectives
We will emphasize that the PRC already has the policy space it needs to achieve its domestic policy agenda, which is similar to the space available to other monetarily sovereign nations, including Japan, the United Kingdom (UK), and the US2—even if that means that the budget shows a deficit
Summary
This working paper addresses the fiscal and monetary policy options that are open to the People’s Republic of China (PRC) as a sovereign currency-issuing nation. The paper will argue that with its own fiat currency, the PRC’s central government can afford to spend enough to pursue its desired development path Against this background, we will emphasize that the PRC already has the policy space it needs to achieve its domestic policy agenda, which is similar to the space available to other monetarily sovereign nations, including Japan, the United Kingdom (UK), and the US2—even if that means that the budget shows a deficit. We will emphasize that the PRC already has the policy space it needs to achieve its domestic policy agenda, which is similar to the space available to other monetarily sovereign nations, including Japan, the United Kingdom (UK), and the US2—even if that means that the budget shows a deficit It should be noted, that excessive government spending does raise the prospect of fueling inflation.
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