Theoretical And Empirical Study Of Supply And Demand For Money And Monetary Policy

Money has been playing an important role in modern economy, and the monetary policy is one of the main policies that adjust the macroeconomy. But the effectiveness" of monetary policy depends on the peculiar mechanism of supply and demand for money and the clearness of monetary policy transmission. Since the economic opening and reforms in China, the financial system has been changed greatly. If we can not figure out the changing mechanism of supply and demand for money and changing feature of monetary policy transmission mechanism, the monetary policy will hardly play the key role. Based on the western monetary theory and by using of the econometric method, the thesis studies mainly the determination of supply and demand for money, the monetary policy transmission mechanism and effectiveness of monetary policy etc.(1) After 1990s, money demand relations of our country turn towards the general theoretical relations, and money demand show a stable and long-term relations with the variables such as income and interest rate etc. Displayed by the empirical study, M2's income elasticity in our country is a little more than 1, and M1's is 0.68. It proves that M1's increases don't have the same proportion with the increases of income, while M2 and income both increases almost at the same proportion. The reasons to explain it are that, with the deepening of reform, people expand their expectations for future expenditures and residents' propensity to save is raised, thereby, the growth rate of residents' deposit is relatively high. The empirical study also displayed that money demand of our country has positive correlation with the transaction value of stock market. That is to say, the expansion of stock market and the increase of transaction value will lead to more demand for money. If the central bank takes no account of added money supply which created by the derived money demand through stock market's expansion, it will certainly result in insufficient liquidity in the real economy, and further affect the growth rate of economy. Therefore, the influences exerted by the development of stock market over money demand can't be ignored.(2) Money supply in our economy has endogeneity. Generally speaking, money supply is determined by money multiplier and base money. So, the endogeneity of money multiplier and base money decides the endogeneity of money supply. Similarly, the changes in money multiplier and base money will cause changes in money supply.Based on the empirical research, during growth of M2, there are about 60% changes caused by base money and 40% of those caused by money multiplier. For this reason, the central bank must consider comprehensively the influences of base money and money multiplier when it want to increase money supply.(3) Empirical research shows that the central bank can use monetary-policy tools such as interest rate, reserve ratio and central bank's loan etc. to adjust money supply. Meanwhile, the changes in money supply can adjust changes in Gross Domestic Product (GDP) and prices and eventually realize the goals of monetary policy. Since operation features of economy and regulation mechanism of monetary policy have change a lot, we can take 1997 as a boundary line and divide time-series data into two periods: earlier period and later period. By means of comparison, we can find out that, in later period, monetary-policy tools have shorten effecting time lag of money supply, and interest rate obviously strengthen adjustment on each money supply levels. This shows that, in recent years, our interest-rate policy is effective. Meanwhile, empirical research also demonstrate money supply have remarkable effect on Gross Domestic Product (GDP) and price. Hence, monetary policy in our country has a nature of unneutral.(4) After broken-out of Asian financial crisis, our country's economy still don't fall into the "liquidity trap" and our monetary policy is effective. Empirical research show that current interest-rate level of our country doesn't reach the lowest extent which cannot be lower...