A Study On Effect Of International Payments On Money Supply

In an open economic system, international payments have a great influence on the domestic money supply, and lead to an increasing characteristic of endogeneity. After exchange rate reform of RMB in 1994, great changes have taken place in international payment situation, and its effects on money supply have become more and more obvious. Especially after 2002, steady surplus of international payment not only causes the fast accumulation of foreign reserves, which increases the pressure on RMB appreciation; but also leads to the rapid growth of domestic money supply, causing over-heated economy. It is believed that the influence of international payment on the domestic economy is mainly concentrated on the money supply. The rising price index and high investment growth rate are its evidence and direct result. In order to understand the influence of payments on domestic money supply, and explore the exact source of RMB appreciation pressure in China, this dissertation analyzes this problem deeply from theoretical and empirical aspects. It is believed in this dissertation that international payments normally affect money supply by "Money demand mechanism" and "exchange rate supply mechanism". Usually, international payments affect money supply by the following ways: the forms of fluctuation of price index and economic growth rate and money crisis, or the measures including foreign exchange intervention and sterilization by central bank directly and indirectly. Guided by such a kind of new thinking, this dissertation makes an empirical research on the international payments and money supply situations of China in the period of 1994-2003, by using aggregated and structural and quantitative analysis. Meanwhile, this dissertation compares the cases of Mexico and Southeast-Asia crisis, which were resulting from international payments problem, and finds out international payment has caused great effects on the domestic money supply, as well as increasing dependence on the international payments in the money supply. This dissertation doesn't simply put current account and capital account together in analyzing the influences of international payments on the domestic money supply. Under the trade and floating capital, changes in the state reserves is the direct reflection of our international payments status, which affects the assets structure of central bank and supply amount of basic money supply as well as structure of basic money supply farther. Consequently, it could accurately reflect the extent of influence of payments on money supply by choosing foreign reserves as an indicator. During 1994-2003, the coefficient between foreign reserves and money supply M2 is as high as 0.9729, obviously, there is a positive relation. It is revealed by the result measured by regressive model, as foreign reserves changes 100 million USD, money supply M2 will change consequently 17.58 billion USD in the same way. In the past 10 years, increasing in the state foreign exchange reserve will increase the money supply M2, and the mean rate excess 36.04%. In recent two years, the influences of international payments on domestic money supply are mainly concentrated on the increasing pressure of RMB appreciation. The central bank should tradeoff between stability of RMB and fluctuation of domestic money supply. Then, how to lessen the money supply effects of international payments? This dissertation gives two countermeasures: on the one hand, starting from institutional reform and realizing "managed floating" of RMB exchange rate; on the other hand, controlling fluctuation of international payments, and eradicating the endogenous risks of money supply by foreign trade and foreign capital. In a sum, the innovation parts of this dissertation as bellow: 1. Analyzes the endogeneity of money supply from a new aspect by organically combining international payments with money supply, and expresses such a view that domestic and international economic activities are interacting and influencing each other in today's opening economy; 2. Proves that the great effects of international payment have on money supply since 1994 by using empirical method; 3. Systematically explores the causes of RMB appreciation pressure by analyzing the influences of international payments on the money supply, and finds new proof for institutional reform of RMB exchange rate; 4. Puts forward reasonable and practical suggestions for institutional reform according to the research result by normative and empirical research.