Banking, Credit Money Creation And Business Cycle

Although we can not live without money today, but for the origin of the currency, As so far it is difficult to have a clear definition or explanation, Which is the same as when we research the role of money in business cycle theory Just because the economists have different points to the money. In the current mainstream macroeconomics, Money remains the veil of the real economy in Walrasian general equilibrium and does not have substantive significance, or only can disturb the economy at best. However, all the macroeconomic variabling in the economy is not from any kind of production function, but only from the monetary and financial systems where all the macro variables are an integral part of the money supply systems required the maintenance of a stable macro-variables ratio was able to ensure sustained economic growth.Based on the monetary prospective, The nature of business cycle may be revealed through combining the monetary analysis with physical analysis.This paper analyzes the historical evolution of credit money at first,through the credit market, stock market and bond market,the author explores the credit money creation process, and confirms the roles of the banks and other financial institutions in creating credit money. Just because of their existence, credit money can be created at any time, but not necessarily be invested in productive activities. At the same time the currency flows in or out of stock market, bond markets and other capital markets can fluctuate the money supply which made the macro-economic regulation and control may not reach the expected results. Considering China is transitional economy period of financial institutions, the author explains China's credit management system changes on the institutional perspective and finds that the government intervention exists in China's economic development process which can not be analysed by classical or neo-classical theory. Only the companies and individuals can be focused on while the factors of government have been paid no attention to (or even rejection) in classical or neo-classical theory when we look at the entire history of economic theory which is different with China today. Based on the institutional analysis, the author draws this conclusion:"China's financial institution inclulding credit management system is going the route of the original logic of history and changing continuously, this process is deeply branded on the government-leading mark,Which makes the credit money creation be different with other countries. " Another factor can not be ignored in the credit money creation is central bank. Sun Guo-feng (2003) said that the money creation of commercial banks was constrainted by cash pulling, clearing and legal deposit reserve. But for the deposit reserve constraints, this paper analysed empirically the deposit reserve ratio and money stock from 2006 to 2008 and found there is not granger causality between them, The legal deposit reserve requirement mechanism isn't effective based on endogenous money supply theory which generates the gap between the anticipative goals and real operative effectiveness of legal deposit reserve requirement.At the same time for the existence of excess liquidity, price of consumer goods and raw materials rising, irrational structure between investment and exports, etc, All of these issues can not be resolved relying solely on monetary policy.With the openness is deeper, domestic and international financial situation will become more complex, macro-regulation is increasingly critical, the government should carefully select the regulatory tools to fundamentally solve the imbalances of overheating economic structure.For the impact on economy from the credit money, the article consides the particular market--the real estate and in turn extends the study to the entire macro economy about the relationship between money and prices,GDP. Eventurally the author explains the abnormally high phenomena of M2/GDP in China through synthesizing stock-flow methods under the frame of endogenous money supply and the relation between credit volatility on economic fluctuations.