VoxEU Column Macroeconomic policy Monetary Policy

A good example of dealing with macro problems using micro tools

China recently issued a set of new policy documents with the aim of stabilising prices in the country. This column asks whether these proposals are just dusted down manuscripts from the 1980s, disregarding thirty years of market-oriented reform. The term “monetary policy” is not even mentioned once.

On 21 November China’s State Council issued a set of new policy documents (for short, the Sixteen Articles) to stabilise prices. This is encouraging. Policymakers have started to take price increases seriously.

But reading the document is like a time machine, putting my feelings right back to the 1980s. Of course, if the document were issued in the 1980s, then there would probably be one article specifically capping the prices by the government. In those years, prices of many products, including food products, were directly controlled by the state. But even with that, the government was not able to contain inflation pressures. CPI went above 10% in both 1985 and 1988 (see for example Brandt and Zhu 2000).

Of all the sixteen articles, two are probably the most important:

  • The seventh article focuses on providing temporary price subsidies.
  • The eighth proposes a linkage mechanism between social security payment and price increases.

These make sense. After all, the poor are often hurt most since their income is the lowest and grows at the slowest pace, and food accounts for a big portion of their total spending. It is critical to provide some assistance to the poor when inflation is high. From a long-term perspective, the government should shift from supporting growth to supporting social security in order to ensure political stability.

The dog that didn’t bark

The most striking feature of the entire document is the missing term “monetary policy”. It was not mentioned even once. Why?

One possible reason is because some prominent Chinese economists argued that current high CPI reflects structural adjustment of prices, not inflation. If that's the case, then we don't need monetary policy tools. But if general prices are rising at faster paces, then it is hard to argue that it is not inflation. Inflation is a monetary phenomenon. In 1988, 1994, and 2007, there were always economists arguing that high CPI was the result of structural price adjustment. Without seriously tightening monetary policy, inflation ballooned out of control in all those years.

Indeed, the policy measures suggested by the "Sixteen Articles" were not only micro in nature, but also central planning in style. For instance, they called for better management of farms for winter grains and oils. They required the railway department to properly arrange cotton transportation in Xinjiang. It ordered the state power grid not to cut off power supply to fertiliser factories and to close down some illegally built corn processing factories. I really lost the sense of time. Are we really entering the second decade of the 21st century after thirty years' market-oriented reform?

Perhaps the People’s Bank of China is a lone voice. On Saturday it raised reserve requirements again. But that is probably not enough. Why did food prices increase? There must be reasons in the production and transportation processes. But if prices are rising across the board, then it is not a micro issue but a macro challenge. Why have prices of agricultural products skyrocketed one year after another? This is because we have too much money. And real deposit rate is significantly negative. In other words, the monetary policy environment has forced everybody to speculate. If you don't speculate, you definitely lose money. Speculation, however, does not guarantee profits.

The government is busy cracking down on speculators. Every time the government does it, more speculators come up.

During the sixty years of the People's Republic, we have learned that administrative measures are not effective in controlling inflation. For instance, the government often forbids university canteens from raising food prices, so prices do not change. Instead the portions get smaller. Unfortunately the government is doing the same again.


Brandt, Loren and Xiaodong Zhu (2000), “Redistribution in a Decentralized Economy: Growth and Inflation in China under Reform”, Journal of Political Economy, 108(2):422-451.