The Empirical Analysis Of The Endogeneity Of Money Supply In China's Economy

The problem of the money supply has been attracting central bank attention for a long time. For the appropriation of the money supply influences monetary policy effect directly. Too much money supply may cause inflation, on the contrary lead to deflation, which both affects the development of one country's economy. The scholars use the property of the money supply to explain the economy problems, which are caused by the money supply. So, the economists have argued whether the money supply is exogenous or endogenous.In China, after the 1997's Asia Finance Crisis, money supply has been rising, but price has been decreasing since 1998. So far, money policy has improved the inflation condition, but not for the deflation condition. Thus the research of our current monetary supply problems can provide theoretical basis and practical significance for the adjustment of China's monetary policies, also for the stable economic growth.In this paper, On the basis of a simple comparison between the two kinds of theories in money supply, we find that endogeneity is significant to explain the modern economy problems, then retrospect the theories of monetary endogeneity, from the argument between 'the Currency School' and 'the Banking School' in Britain at the 19th century to the Radcliffe Committee's view in 1959, from early 'the Banking School' to famous the Post-Keynesians, like Tobin, S. Weintraub, Kaldor. N, Moore.B.J, they have great developed the perspective of endogenous money supply. We also make an objective opinion to these theories and papers.The paper is based on the model volume of the money supply = basis money×monetary multiplier, we deduct the model volume of the money supply and monetary multiplier of China economy, the monetary multiplier equations are as follows: Then, we analyse each factor of the basis money and monetary multiplier, the results are as follows:From the three modes from which our country supplies the basis money, rediscount, reloan and occupation of foreign exchange has caused the endogeneity, except finance income. Especially, occupation of foreign exchange has influence the supply mostly, which indicates that this endgenous mechanism of money supply is interrelated with the mechanism of exchange rate in China.It is prepared by the statutory rate, the excess ready rates, currency rates, periodic joint decision with demand deposits ratio, which commercial-banks ready rate is the most important factor affecting monetary multiplier change. The commercial bank can weaken the statutory rate through changing the excess ready rates, so the central bank can not directly control the money supply. It shows the endogeneity。To research the endogeneity by qualitative analysis method, with the general monetary equilibrium theory, choose real money supply m₀,m₁,m₂, nominal money M₂, real gdp , nominal GDP, real interest ratei, nominal interest rate I.This paper uses macro economic data, which is from Jan.1996 to Jun.2006, applies econometric method to test our country's money supply statistically.Firstly, we introduce the testing methods by which differentiate stationary series and co-integration theory in order to find if there is a long equilibrium relationship among the variables.Use unit root test, like ADF, which is the precondition of the co-integration relation and Granger causality test among the variables. We can use Johansen trace test to determine co-integration relation of time series and choose the best co-integration relation. The results are as follows: all of real m₂ , y_t , i_t is I(1),exiting one co-integration relation. Then, use the co-integration variables, to make vector autoregression, get a Vector Error Correction Model (VECM).The models are as follows:Secondly, we introduced the Granger causality testing to determine the casual relationship between the two series. Although the Granger testing causality can not only give us the information of which one determines the other, but also it tells us the level of explanation between the two variables. The test result shows that there is the Granger causality between the m₂ and gdp , m₂ and i_t .Especially, the mutual Granger causality between the real m₂ and real gdp shows that money supply is a endogenous variable in the macroeconomic system, so the central bank can not change the supply discretionarily. After test the nominal and real variable of gdp , different kinds of money supply and interest rate, we find that adding the variable i makes the mutual Granger causality between money supply and output, which indicates interest rate is the important transmit intermediate.Thirdly, testing the impulse response and variance decomposition for VECM in order to find which effects the fluctuation of the money supply. It turns out that output and interest rate make a positive impulsion to the money supply in a long time. The result of variance decomposition indicates that at first money supply itself brings the mainly impulsion, but as the process of time, output and interest rate impulse money supply much bigger .The endogeneity of money supply has become much stronger.With these analyses, we can prove that the money supply in our country is endogenous. In macroeconomic adjustment period, our country is different from the developed countries, like the money generation process, the function of money supply, the development of the finance market and money transmission mechanism. There is a market or system block during the transmission process from the money to the output in our economy by the fluidness of the capital, the use of monetary multiplier, the elasticity of the interest rate from money demand and so on, which makes money supply more and more endogenous. The typical case is increasing the money supply for stabilizing our economy.Thus, we provide some policy advices in precondition of endogeneity.Firstly, carry out 'both-steady' policy, which means steady fiscal policy and steady monetary policy. It is propitious to keep our economy with a equilibrium development.Secondly, enhance using the validity of money policy tools and dig up structural adjustment function of monetary policy.Thirdly, the Central Bank should treat price as an important monetary policy tool.Fourthly, monetary policy should develop harmoniously with exchange-rate system.