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Combating the Global Financial Crisis with Aggressive Expansionary Monetary Policy: Same Medicine, Different Outcomes in China, the UK and USA


  • This paper was presented at The Global Financial Crisis conference organised by the Leverhulme Centre for Research on Globalisation and Economic Policy (GEP) and the School of Contemporary Chinese Studies at Nottingham University at its Ningbo campus in China on 10 November 2009. We are very grateful to Sue Berry, David Greenaway and Shujie Yao for their great help and extreme patience in bringing this paper to fruition; and to Vivek Arora, Shuming Bao, Louis Kuijs and Helen Qiao for important help in getting enlightening data.


In 2008–09, the USA and the UK undertook quantitative easing to drive interest rates to near zero to combat the global financial crisis, and China increased the growth rate of base money slightly. The resulting credit growth was very slight in the USA and UK but very large in China. The US and UK money multipliers collapsed because the required capital adequacy ratio (CAR) was binding for many of their banks. Specifically, the value of the money multiplier is zero when CAR is not met, is one when CAR is binding and when the asset purchased by the central bank requires the commercial bank to hold capital against it, and equals the reciprocal of the required reserve ratio when CAR is not binding. To improve China’s economic performance, we propose three new growth drivers to replace the present instruments of macro-stimulus: changes in rural economic institutions to create new entrepreneurs, an urbanisation strategy based on the principle of future home ownership and modernisation of the financial system.