Strategies for Internationalizing the Renminbi by Yuanzheng Cao

Author:Yuanzheng Cao
Language: eng
Format: epub, pdf
ISBN: 9789811308000
Publisher: Springer Singapore

Time

1970–1974

1975–1979

1980–1984

1984–1989

1970–1989

Japan

10.7

7.5

3.9

1.2

5.8

Germany

5.6

4.2

4.5

1.3

3.9

Unit %

Also differently from Japan, the monetary policy of Germany foregrounded the equilibrium of the domestic economy as its primary goal. As such, the issue of the exchange rate took a backseat to the issue of inflation. With this monetary policy, the German economy was able to rid itself of the pressure of imported inflation and to achieve a rapid growth. For a long time, CPI had been regarded by the central bank of Germany as the foundation of the monetary issuance mechanism. Germany once strictly controlled the monetary credit loans as long as the monetary base did not register a large growth. For example, from the 1950s to the 1980s, the inflation rate of Germany held steady at around 37%. Even after the 1985 Plaza Accord, when Germany should have mitigated the contractionary effect brought by the domestic currency appreciation to the domestic economy, the country continued to expand its currency issuance. The central bank continuously cut the discount rate, from 45% in July 1985 to 25% in December 1987. As Germany’s prices rebounded and its economic growth accelerated, however, the central bank of Germany adjusted its monetary policy and began to adopt a tight monetary policy to stabilize the rate of inflation. In July 1988, the central bank of Germany also raised the discount rate. By April 1989, the discount rate had reached a level of 4.5% and continued increasing until September 1992. The reunification of West and East Germany in the early 1990s decelerated the overall growth of the country; in order to boost the economy, at the end of 1992, Germany entered into a stage in which a moderately expansionary monetary policy was adopted. Such a policy not only buoyed the economy, but also controlled the rate of inflation within an acceptable range. From the above explanation, it can be seen that the monetary policy of Germany always put anti-inflation as its priority. The openness of the exchange rate and that of the capital account were always subject to the principle of maintaining the independence of this monetary policy. As a result, Germany’s domestic economy was always stable, which laid a foundation for the internationalization of the Deutschmark.

Let us look, then, to the developing countries. As previously mentioned, after WWII, developing countries had a fundamental need to achieve rapid economic growth through industrialization, yet this required an as-yet unproposed series of policies and systemic arrangements (including finance) for accelerating the formation of capital. The central aim of these arrangements was to foster a distorted market. When this goal was reflected in the foreign exchange system, foreign currencies would be overvalued while domestic currency would be undervalued. Furthermore, the country pursuing such a goal would adopt various measures to consolidate the distorted exchange rate, which would then be developed into a stable and long-term situation. It should be pointed out that under the Bretton Woods system, due to restrictions from the inherent regulations of the international monetary system, any and all efforts put forward by developing countries had the potential to be effective.

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