Analysis Of Excessive Liquidity And Effectiveness Of Monetary Policy

Currently, the problem of excessive liquidity in China has been more and more critical and has been inducing overheated investment, inflation and asset bubble etc. Japan's economic bubble burst and the financial crisis in South East Asia have given other countries profound lessons.Monetary policy is the main measure for a government to regulate macroeconomic. Its main tools are interest rate, issuing central bank bills, adjusting the deposit reserve ratio etc which could return surplus money to some degree. Money supply has always been the intermediate goal of monetary policy, through changing the amount of money by several tools, to regulate the macroeconomic such as fixed asset investment and inflation. However, the reason causing the excessive liquidity is so complex that the money policy is unable to achieve the expected goal. Under this circumstances, whether the money policy is effective, how to improve the effectiveness of the money policy, what policy should be adopted to solve the excessive liquidity problem are all the questions this paper is trying to explore which will bring practical significance to the economic difficulties.There are three new ideas in this paper. First, to analyze the excessive liquidity problem through money demand and supply theories in order to reveal the internal and essence reasons. Second, to combine the excessive liquidity to the money policy effectiveness, through prediction and correlation analysis, studying how to choose intermediate goal of money policy under new environment as well as providing theoretical basis for making decisions. In addition, there are also analysis on the influence of excessive liquidity and relevant policies on the international trade and export enterprises..The conclusion is that, excessive liquidity has been bringing much unfavorable affection to the economy, especially to the exporting business and exporting enterprises. On the other hand, it will also benefit our trade terms, trade structure and core competitiveness of the enterprises. Excessive liquidity arises from direct reasons such as large amount of foreign exchange reserve, foreign exchange policy and the system of commercial banks; the deep reason including the global environment and the out-of-balance of internal economic structure; From theory, the demand of money is less steady, and the currency endogenous has enhanced gradually. In this situation, when making money supply as the intermediate goal, the effectiveness of the monetary policy must be decreasing to a great extent. Through the calculation, the money supply has good measurability, which means the central bank could be able to forecast the accurate money demand by forecasting the money multiplier in order to make right decisions of the total volume of currency issued. However, the money supply has weak correlation with GDP and inflation growth, that is to say adjusting the amount of currency can produce little influence on the macroeconomic. In addition, the controllability of the currency supply is poor and the central bank's control of the amount of currency is more and more limited which decreases the effect of the money polices. Therefore, to solve various economical problems produced by excessive liquidity should consider two aspects. First, to adjust the internal policies and systems. Second, to adopt different intermediate goals under different economical environment such as inflation rate to assure the effectiveness of the money policy.