The Expansion Of China's Money Stock And Its Relationship With Inflation

This paper aims to study the expansion mechanism of China's currency stock and the inflationary effect of expansion.According to the provisions of the People's Bank of China Law,the goal of China's central bank policy is to "maintain the stability of the currency value and promote economic growth",that is,to promote economic growth while maintaining the stability of the currency.Among them,maintaining currency stability involves controlling inflation,while controlling inflation is controlling monetary aggregate(M2)based on "all inflation is a monetary phenomenon",and money stock is positively correlated with inflation,M2 Increase,the inflation rate will inevitably rise,and vice versa.Therefore,China's currency is targeted at M2.However,for a long time,the relationship between M2 and inflation in China is not positively related,but often deviated from each other,that is,the increase in M2,not inflation.The rise in the rate is the decline in the inflation rate.This divergence between the two is called the "mystery of China." This paper argues that the so-called Chinese mystery is difficult to explain with the traditional Western exogenous theory,and the assumptions and application conditions of the monetary exogenous theory are difficult to apply in China's economic reality.China's endogenous monetary expansion process determines that the divergence between M2 and inflation can only be explained by the endogenous theory of money.This paper first analyzes some of the flaws in the application of currency exogenous theory from the perspective of the application of currency exogenous theory.The currency exogenous theory is based on the equation of the quantity of money.The formula of the equation is:m' = p'+y'-v'According to this equation,the output Y is regarded as the proxy variable of GDP,but in fact Y represents the actual number of outputs(after the price level is removed)in the general equivalent unit.The proxy variable of GDP should be PY,not Y.This is concealed by the reality of economic growth in the application of Western developed economies,but it is applied to economic growth far higher than that of western developed countries.In the Chinese economy,the flaws in the original application were expanded into errors in the conclusions,leading to the so-called "mystery of China.”Secondly,this paper sorts out the historical evolution of China's monetary policy,studies the changes of China's monetary policy objectives and tools,and believes that unlike the western developed countries,there are certain limitations in the implementation of China's monetary policy tools;although M2 is regarded as The intermediate target of monetary policy,but the central bank actually has difficulty controlling M2,and it does not show the intention to control M2.After that,this paper compares and analyzes the relationship between M2 and CPI in developed countries during the period of using monetary stock as an intermediate target.It is found that developed countries represented by the United States and Japan have also experienced a "deviation" phenomenon during this period,but the reason Mainly due to the development of the stock market,this is inconsistent with the status quo of China's underdeveloped capital market,and to a certain extent contradicts the conclusion that the currency exogenous theory has a positive correlation with the growth rate of money stocks and inflation rate.In general,this paper argues that China's reality and the currency exogenous theory do not agree with the assumption that "the currency is issued by the central bank to control freely" and "the short-term output and the velocity of money are constant".The currency exogenous theory is not suitable for explaining the relationship between China's currency stock and inflation in the past few decades.Copying the theory of currency exogenous will only fall into the difficult situation of the "mystery of China".This paper argues that in China's fast-growing economy,the demand for money is endogenous,thus establishing the endogenous demand function of money from the perspective of currency endogenous,and giving the demand equation an empirical study on the relationship between M2 and CPI in China.The results show that:1 Fixed asset investment is the most important reason for the rapid growth of M2.Public infrastructure investment and real estate market have played an important role in the development of China's economy;the "deviation" relationship between 2M2 and CPI is not only due to the lag effect of monetary policy,but also because investment has "squeezed out" "Effect;3 China's money supply is more endogenous rather than exogenous.4 China's fixed asset investment is characterized by a deflationary effect in the short term.This paper argues that the neglect of the short-term deflationary effects of China's fixed assets may be the cause of excessive fiscal stimulus.Traditional theory holds that fiscal stimulus has a full positive effect on inflation,so when deflation occurs,large-scale fiscal stimulus can effectively improve the trend of deflation and return prices to normal levels.However,this paper finds that fixed-asset investment has a deflationary effect in the short-term,so the implementation of large-scale fiscal stimulus may lead to further deflation.According to the transmission mechanism of the traditional theory,this phenomenon may be mistaken for "stimulation",thus introducing more Large-scale stimulus policies that lead to excessive stimulationFinally,this paper gives policy recommendations for the research conclusions:1 Keeping asset prices steadily and slowly rising may be an effective means to achieve real estate market regulation and reasonable control of inflation.2 should pay attention to the short-term deflation effect of fixed asset investment,to avoid excessive stimulus caused by misinterpretation of economic indicators.3 In the process of implementing fiscal policy,a smoother stimulus should be adopted to avoid large-scale fiscal stimulus and cause serious deflation in the short term.