Financial Innovation And Its Effect On Monetary Policy

In course of integration of world economy, finance and economy is becoming indivisible. Its contribution to economy is becoming greater and greater. No matter in a developed country or in a developing country, finance has already permeated through every field in economy with its stronger and stronger power. Moreover, it has been turned into one of the crucial and decisive factors restricting economy improvement Financial innovation is just the inherent power which financial development needs. As a wave of finance reform in the world wide, financial innovation brings about profound changes to finance and economy. The emergence of new tools, new techniques and new markets, as well as giving strong power to economy, it also gives a severe shock to economy, and offers a new challenge to macro-control of every country. As we know, monetary policy is always one of the most important financial policies and the most important macro-control tools. Now financial innovation expands credit creation, so it inevitably affects monetary policy. So the research of financial innovation effects on monetary policy is a valuable subject, whether in theory or in practice.Financial innovation puts up a new production function in financial area. It's a new combination of kinds of all factors. It is a market reform to pursuing profits opportunity. The essence is that through setting up new system and adopting new method or new tools, the liquidity, profitability and security of financial assets will be integrated in high degree, thus financial efficiency will be improved. Since 1970s financial innovation has been developed rapidly for the integration of many factors, such as development in science-technology, financial deregulation, intensified competition between the financial institutions and pursuing profits of financialenterprises. Financial innovation brings a challenge to traditional monetary policy. It changes the function of variables in money demand function. It reduces money demand, changes monetary structure and velocity of money circulation. It also changes the definition of money and make money calculation more complicated. It increases bodies of money supply, and enlarges money multiplier. Certainly financial innovation has brought about a series of effects on the selection of the intermediary target, the tools function and transmission mechanism of monetary policy, and made its implement more difficult. Therefore, the thesis puts forward some suggestion. Firstly the means of monetary policy should be innovated. Secondly the range of monetary policy control should be enlarged. Thirdly the policy making should strengthen international impact.Nowadays the positive analysis of financial innovation effect on macro-economy is rather insufficient. The thesis is almost theoretic too. So it is inevitable for the paper to contain immature or even incorrect ideas. However, the writer still tried to do systematic demonstration and expected to advance some constructive ideas not only in theory but also in practice.