| This thesis studies the influences on monetary policy from financial innovations empirically in China. Financial innovations, which surged in western countries, have had comprehensive influences on the financial sector and the whole economy from 1970s. In China, since the reform and opening-up in the late 1970s, financial innovations have developed very rapidly and brought about deep changes to the social and economic life. Therefore, the effects of financial innovations in China, especially its influences on monetary policy, is a important topic and deserve to be studied deeply, which directly influences the decision-making and performance of monetary policy, and should be more taken into account by the government departments especially the monetary authority. Thus, studying this issue has not only great significance to policymaking, but also high significance in theory. However study on financial innovations is still at a superficial level in this country, especially there are almost no fruitful studies to the Chinese financial innovations' influences on monetary policy. Moreover, all these studies have shown a lack of systematization and comprehensiveness.On the basis of the literature review, I have first reviewed financial innovations and its effects on monetary policy in western countries and made it as reference to this study on China's financial innovations. Since the late 1960s or the early 1970s, financial innovations have become prevalent in the western developed countries, which were caused by the specific historical backgrounds. There were a great variety of financial innovations for different purposes, including transferring risks, increasing liquidity, creating credits, creating equity, increasing earnings and facilitating payment and settlement, etc. The financial innovations have influenced finance sector and whole economy so widely and profoundly in western countries from 1960s to 1980s that led to a series of changes in monetary policy.In order to analyze the financial innovations' effects on monetary policy in China, it is necessary to understand the situations of financial innovations in China first. Using the domestic and overseas experiences as references, financial innovations in China were classified into four types, i.e. financial institute innovations, financial market innovations, financial product innovations and financial technology innovations. Then I summarized the practices of financial innovations in China since the late 1970s. On the basis above, it is shown that the financial innovations have remarkable contributes to Chinese financial deepening and development. These effects have greatly changed the environment for monetary policy performing in China, and perhaps monetary policy was influenced by it in turn. In order to prove the hypothesis, the arguments in this thesis mainly fell into four areas.Firstly, I analyzed the changes in the demand for money may arise by financial innovations in China. Using the western theories about the demand for money as references and linking with China's realities, I made a regression model of China's traditional money demand with the sample data of 51-year time series after the foundation of PRC. China's real money demand can be theoretically explained by real national income, interest rate of deposit, expectation of price volatility and progresses of marketization. It is proved that there is a structural change occurred from 1993 in the regression model of China's traditional money demand by using the Chow Breakpoint Test and adding a dummy variable into the model. A preliminary result showed that the structural change probably be mainly caused by financial innovations. In order to confirm this hypothesis, by adding a variable relevant to financial innovations into the traditional money demand model, a new money demand model with the sample observations of quarterly data from 1993 to 2003 was applied to observe the explanatory ability of this variable. The key here is selecting an appropriate variable, which well express financial innovation. Referring to Arrau and others' variable selecting methods by which they studied the influences on money demand from financial innovations in some developing countries, and combined Chinese realities, I chose the ratio of M2 (broad money) to MO (cash in circulation) as the proxy variable of financial innovation in the model, which can imitate the financial innovation process in China. The result indicated this variable make sense statistically and its coefficient of elasticity is positive. It also showed that financial innovations in China have resulted in an increase of money demand. The reasons are that financial innovations created more financial assets transactions and stimulated more financial speculation, thus increased transactional and speculative demand for money.Secondly, I investigated the influences on the control of money supply caused by financial innovations in China. A monetary authority's controlling ability for money supply depends on its regulating and controlling ability for money base and its influencing ability for money multiplier. Because a monetary authority could actively regulate and control money base through open market operations, changing on-lending and rediscount rates, its controlling ability for money base should have been relatively strong. Money multiplier is influenced by required reserves ratio, excess reserves ratio, cash ratio and non-transactional deposit ratio among which the monetary authority cannot control the latter three, so the monetary authority's controlling ability for money multiplier is relatively weak. On January 1st, 1998, the People's Bank of China cancelled the policy of loan quota which had been implemented to the State-own commercial banks for several years, and changed the controlled target from loan aggregate to total money supply. Correspondingly, the People's Bank of China has been trying to improve and enhance its control to money base gradually by using multiple policy tools since the mid-late 1990s. The reasons why the Chinese monetary authority converted its controlling ways for money supply and money base lay in meeting with the needs of economic development and updated financial environment. It is financial innovations that changed financial environment. Financial innovations changed China's financial structure and thus promoted shift of the controlling ways for money supply, and also provided conditions and bases for this shift. Besides above-mentionedresearch, the financial innovations' influences on the variance of money multiplier in China were analyzed by using econometric model, with building regression models of the three influencing factors respectively except reserve requirements ratio, investigating the financial innovations' influences on these three factors, and then building a regression model of money multiplier to analyze the financial innovations' integrated explanatory ability for the variance of money multiplier. I made a co-integrate regression to the models mentioned above respectively with the yearly data since the year of 1985 and the quarterly data since the year of 1993. The regression analysis verifies that the factor of financial innovations is an explaining variable for the variance of money multiplier and its different influencing factors. At the same time, Chow Breakpoint Test proves that the regression model of China's money multiplier has not a steady structure and can't be used for precisely predicting money multiplier. Thus, it becomes more uncertain and difficult to realize its settled controlling target of money supply for the monetary authority. It is resulted from the randomness and imbalance in the progress and impacts of financial innovations.Thirdly, I studied the financial innovations' influences on choosing the China's intermediate targets of monetary policy. It is thought that China's traditional intermediate target of monetary policy was loan aggregate. With the change of historical backgrounds and situations, the theoretic basis of the traditional intermediate target has shaken gradually, so the People's Bank of China turned to choose money supply as the intermediate target of monetary policy in 1996. I took the criterion of choosing the intermediate target of monetary policy as the theoretic basis, and testified the function of financial innovations in the transition from the traditional intermediate target to the modern one in an econometric way. According to the meaning of effectiveness of an intermediate target of monetary policy, I argued that we could use Granger test of causality to analyze econometrically the controllability and correlation of an intermediate target of monetary policy. The verify check for controllability and correlation of loan aggregate showed that the traditional intermediate target had ever been controllable before 1980s, but was no longer uncontrollable after 1990s, and also thereafter the correlation between loan aggregate and ultimate objectives of monetary policy has dropped to some different extent, and the causality between them disappeared at the same time. That is to say, correlation between the traditional intermediate target and the ultimate objectives of monetary policy is no longer notable. As the intermediate target of monetary policy, loan aggregate became ineffective mainly because of financial innovations. As to measurability, financial innovations especially financial institution innovations have influenced measurement of of all financial institutions' loan aggregate to a certainty. As to controllability, because of financial innovations, the proportion of the state-owned commercial banks' loan aggregate declined and the proportion of other financial institutes' raised, which made the monetary authority unable to realize its purpose of regulating all financial institutes' loan aggregate through controlling the state-owned commercial banks' loan scale. Granger test of causality tells us that the sustaining enlargement of loan scales of other financial institutes except the state commercial banks and the rural credit cooperatives have significantly influenced the changeof all financial institutions' loan aggregate after 1990s. As to correlation, with deepening of security innovations, and continuously emerging of new financing instruments and financial markets, the financing channels of economic entities diversified and the process of money creation became more complicated, so that the loan aggregate's influences on money supply became weakened, thus the correlation between loan aggregate and the ultimate objectives of monetary policy became weakened, and even disappeared. Granger causality test proves that the causality between loan aggregate and total money supply has no longer existed since 1990s, but the causality is notable between financing quantity of stock market and total money supply, which verifies the securities innovations' influences on the correlation of the traditional intermediate target.Finally, I testified the financial innovations' influences on the development and effectiveness of monetary policy transmission mechanism in China. Mishkin classified monetary policy transmission mechanism into four types, i.e. the transmission channels through interest rate, exchange rate, asset prices and credit. I put the exchange rate transmission channel in neglect. Monetary policy transmission mechanism has evolved since the start of reform and opening-up in China. Nowadays, the credit transmission channel is converting into modern mechanism from traditional one, and the interest rate transmission mechanism and the stock price transmission mechanism under the modern monetary policy framework have also gradually taken effect. Financial innovations created necessary financial conditions for the development of the above mentioned monetary policy transmission mechanisms. On the basis of qualitative analysis and the meaning of monetary policy transmission, I still chose Granger causality test to verify effectiveness of the interest rate, stock price and modern credit transmission channel respectively so as to investigate the financial innovations' effects among them. The test to the interest rate transmission mechanism indicated that the present financial innovations' influences on the interest rate transmission mechanism in China were limited because the financial markets created by financial innovations were not still well developed. The test to the stock price transmission mechanism showed that although this mechanism began to take effect, it was not still perfect. The change of money supply could be transmitted to the stock market effectively, but the transmission channel through which the stock price transmitted to the real economy was still blocked. To some extent, this phenomenon perhaps resulted from the current situations of the stock market and relevant financial products innovations in China. Each chain of the modern credit transmission mechanism in China was effective, and both effects on the monetary policy transmission through the bank loan and the balance sheet channel were significant. The availability of the bank loan transmission channel seemed to demonstrate that financial innovations in China hadn't shaken the major role that credit played in the financing structure of enterprises, and the availability of the balance sheet transmission channel probably showed that the stock market innovations had influenced the effectiveness of credit transmission mechanism.According to the conclusions drawn in the preceding parts of this thesis, I try to forecast the development trend of financial innovations in China and the challenges and changes in monetary policy arising from them, and propose some policies and measures which should...
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