From Money Supply Volume To Inflation Targeting System

Monetary policy is one of macro interferential policies in a country. Compared with fiscal policy, monetary policy is the most disputed and popular research on monetary and banking economics because of the complexity of transmission mechanism and uncertainty of the policy. Accordingly, because there is a complicated transmission mechanism and a long time lag, it is necessary to select an intermediate variable to measure the effect of monetary policy so as to judge if it is necessary to adjust and the adjusting extent. The intermediate target varied from the cash targeting to the bank credit targeting and the later to the money supply volume targeting along with constantly transformation of microeconomic character and microeconomic agents. Not only microeconomic character but also microeconomic agents have changed largely associated with the policy of reform and opening deepening in this decade, so some scholars and experts begin to argue the validity of the money supply volume targeting. The paper analyzes the validity of the money supply volume targeting, and the outcome is that the validity of this target is weakening continually, we also discuss the cause of this outcome, so it is necessary to search a new forward-looking economic variable which is more appropriate to become intermediate target. Then the paper discusses the feasibility of changing the intermediate variable from the current money supply to other economic variable from the point of "three quality" that based on foreign experience and many literatures, and the result of the discussion is that the inflation targeting is most appropriate. Certainly, there is some difficulties in implementing this new target, so we discuss potential difficulties. Finally, we bring forward some advice to overcome these difficulties.