An Analysis Of The Effects Of Financial Innovation On Monetary Policy And The Countermeasures

Financial innovation originated in the 1960's,and has flourished since the 1980's. Narrowly speaking,financial innovation means the innovation of financial vehicles,while broadly speaking,financial innovation means the innovation of the whole financial system,including financial vehicles,financial markets and financial institutions. In various chapters of this paper,both the narrow-sense definition and the broad-sense definition are employed.In recent years,rapidly-developing financial innovation has influenced every fields of finance,including monetary policy. Facing new financial situations brought by financial innovation,monetary policy needs urgent revisions. So,by using financial theories and models,this paper investigates the effects of financial innovation on monetary policy,then ,based on the practice of China's financial innovation,this paper presents suggestions on the revisions of China's monetary policy.According to the above thinking,this paper is organized as follows. Chapter I :introduction. This section presents the definitions of financial innovation and introduces the subject which is to be discussed in this paper. Chapter II:an introduction to financial innovation. This section presents the historical backgrounds,motions and trends of financial innovation. Chapter III:analysis of the effects of financial innovation on the inner components of monetary policy. In this section,the definition and component parts of monetary policy are layed out. Then,the effects of financial innovation on the vehicles,intermediary targets of monetary policy are investigated,respectively. Chapter IV:analysis of the effects of financial innovation on the outer transmitting mechanisms of monetary policy. This section presents theories of the transmitting mechanisms of monetary policy,and investigates the effects of financial innovation on the transmitting mechanisms of monetary policy. Based on the analysis of Chapter III and Chapter IV,this section presents overall appraisal of the effects of financial innovation on monetary policy and points out that,financial innovation weakens the effectiveness of the traditional vehicles of monetary policy,undermines money supply as the intermediary target of monetary policy,also,financial innovation reduces the effectiveness of traditional transmitting mechanisms of monetary policy. Therefore,facing new financial situations,the revisions of monetary policy are inevitable. Chapter V:the choice of China's monetary policy facing financial innovation. In this section,the procedure of China's financial innovation and the development of China's monetary policy are reviewed. Then,the effects of financial innovation on China's monetary policy are investigated. Finally,this paper points out that,in order to adapt to new financial and economic situations and in order to enhance the effectiveness of monetary policy,we should promote China's financial innovation and revise China's monetary policy.