The Effect Of Financial Innovation On Monetary Policy And The Countermeasure

Financial innovation originated in the 1960's,and has flourished since the1980's. 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.In theory, 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 makes 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. In a word, financial innovation has had a profound and far-reaching effect on the monetary policy. This merits full attention of monetary authorities of all countries.Since reform and opening up, China's financial innovation has experienced the stage from zero to sustained development. At present, financial innovation in China has developed in both category and scale. So it inevitably affects China's monetary policy. Therefore, based on the practice of China's financial innovation, the central bank should put forward some suggestions on the revisions of China's monetary policy.