An Analysis Of The Money Velocity Of China

The money velocity and the money supply together make up of the aggregate demand. Given the target of growth rate of monetary income, the change of the money quantity depends on the expected change of the money velocity. The change of money velocity is the results of the economic and financial evolution. And the velocity also reflects the problem in the economic and financial system.The economists have been interested in money velocity for a long time. Before1980s, the velocity functions in the Western countries are stationary, and the change of velocity in the next period can be anticipated well. The money velocity was a good guide for monetary policy. After1980s, because of the financial innovations, the velocity in the Western countries were no longer stationary, which challenged the traditional Monetarist. The monetary authorities in the Western countries no longer used the money supply as the mediate target. But for the countries stilling using money supply as the mediate target, money velocity is an useful monetary policy guideline.Since1994, the People’s Bank of China has been using M2as the mediate target of monetary policy. So money velocity became an important question.Before the Reformation, the velocity of China was very stationary. The People’s Bank of China (PBC) supplied money according to the formula1:8, which meant the ratio of currency to the value of retail goods was1:8. Since the Reformation, the velocities of China have been declining. The M2/GDP is the highest in the world. In this background, the expansionary monetary policy didn’t do well in expanding aggregate demand. At the same time, the high growth rate of money didn’t result in high inflation. So the paper chooses the money velocity of China as the objective of analysis.Actually, just talking about the relationship between money supply and aggregate income is rough. The money velocity is the efficiency of monetary transmission mechanism in essence. So the paper also analyses the monetary transmission mechanism, especially the transmission through stock market and housing market.The second chapter deals with the theory of monetary income. In classical model, the velocity and quantity of money can only change the price level, not the real income. In Keynesian model, the change of velocity only impacts the real income, because the price is sticky. In common situation, the change of velocity can impact both the price level and real income.The third chapter reviews the empirical research on money velocity of Western countries. As the countries going through the similar institutional evolution, the money velocity in the developing countries will go through the same evolution as the developed countries. In the long run, the velocity curves show themselves as U-shaped, which can be explained by institutionalism hypothesis. The U shape is the result of monetization and financial developments. In the short run, the "velocity puzzle" in1982in US induced many arguments. Then the Federal Reserves abandoned M1as the mediate target. In1990s, the Federal Reserves abandoned M2as the mediate targets.The fourth chapter reviews the monetary policy of China, calculates and analyses the velocity of China. Since the Reformation, the velocities of M0、M1and M2have been declining. which is the result of monetization. In the short run, the fluctuations of V1and V2are pro-cyclical, which could offset the effects of the anti-cyclical policy. The PBC takes M2as the mediate target, but the velocity of M2is too low. That is why the monetary policy doesn’t do well in expanding domestic demand.The fifth chapter analyses the factors impacting the velocity of China empirically. The results are in accordance with the institutionalism hypothesis. The monetization of China contains not only the product market, but the equity market and housing market. Since1990s, though the financial industries have been developing very fast, the level is still low and some kinds of structural problems also exist.The velocity reflects the efficiency of money converting to medium of exchange. The sixth chapter analyses the way monetary supply influences the prices of stock and housing, and the way these prices influence consumption and investment. The results indicate that there is something wrong with the stock market, and housing market has been playing an important roles in economy.The change of velocity depends on many factors. Though the central bank can’t control the velocity fully exactly, the government can take some measures to influence the velocity, changing the situation of too low velocity level and improving the efficiency of monetary policy.