A prudent monetary policy refers to adjusting the policy orientation according to the signs of economic changes. When the economy shows signs of recession, monetary policy tends to expand; When the economy is overheated, monetary policy tends to tighten. The ultimate reflection of prices is to maintain the basic stability of prices.
In the management of China's monetary policy, the central bank realizes the steady operation of monetary policy with the relatively stable growth of money supply.
From the general monetary theory, there are two different ways to manipulate the growth of money supply: constant and contingency. The former believes that as long as the money supply maintains a fixed growth rate, the public will make reasonable expectations, so that prices will converge to stability. The latter believes that the money supply should be adjusted by the central bank at any time with the changes of the economy. The disadvantage of the former is that it is too rigid and can hardly run in reality; The latter is challenged by the conflict between the subjectivity of decision makers' predictions and the uncertainty of public expectations for the future. Therefore, many people adopt the method of pre-announcing the growth interval of money supply for regulation.
In China, some people think that controlling the money supply is not a good means of monetary regulation, and interest rate should be the intermediate goal of regulation. In fact, China's interest rate is still in the control stage, and enterprises are still in a period of insensitivity to interest rates. Under this condition, it is practically impossible for the central bank to give up the regulation of money supply and influence the economy by adjusting interest rates instead.
With the improvement of China's economic marketization, the three traditional tools of monetary policy have been well applied.
First of all, in 2003-2004, the central bank raised the deposit reserve ratio twice, although it only increased by 1 and 0.5 percentage points respectively, but it had a great market effect. In the 1990s, the central bank also adjusted the reserve ratio several times, which was much higher than these two times, but the market hardly responded. This shows that the degree of marketization of China's economy is already very high. Secondly, the open market operation is becoming more and more mature. By publicly buying and selling government bonds in the market, the central bank relaxes or contracts the money supply to the commercial banking system, thus playing a role in regulating the money supply and ensuring the implementation of a prudent monetary policy.
With the rapid growth of money supply caused by the fading out of active fiscal policy and the substantial increase of foreign exchange reserves, the central bank has increased the issuance of central bank bills in addition to selling government bonds to offset the excessive growth of RMB. The trading volume of the inter-bank bond market reached about 14 trillion yuan in 2003 and nearly 12 trillion yuan in 2004, which greatly exceeded the trading volume of other securities markets. Third, the use of interest rate instruments is becoming more and more important.
Having said that, do you understand what a prudent monetary policy is?