The Choice Of Intermediary Target Of Monetary Policy In China

For an effective framework of the monetary policy operation, choosing the intermediary target is an important part. Traditionally, there are two alternative indexes used as the intermediary target－interest rate and money supply. Poole's basic analysis has proved that on the premise of minimum variance of output, the common rule to ascertain whether interest rate or money supply should be the intermediary target lies on the specific structure of national economic fluctuation. If the main source of economic fluctuation comes from the money demand, interest rate target should be used. Alternatively, if money demand is stable, and the main sources for economic fluctuation are energy crises, the change of investment structure or consumption structure and etc, using money supply as the target is a better choice.Based on the theory mentioned above, this dissertation tried to analyze the rationality and efficiency of money supply as intermediary target of monetary policy in China. Currently, our country's basic impulsions are mainly from commodity market, meanwhile a long-run equilibrium relationship between the money supply and real GDP exists. Therefore, it is rational for the money authority continuing to carry out the money supply as the intermediary target. However, rationality does not lead to efficiency. Many factors decrease the efficiency of money supply as the intermediary target, including imperfect transmission mechanism of our monetary policy, the instability of currency circulation speed, the incontrollable money multiplier and etc. This dissertation will prove the low efficiency of money supply target through granger causality test. Furthermore it will discuss the main cause of the empirical study result and provide some suggestions on how to improve the efficiency of intermediary target of monetary policy in the current situation in China.