Currency Non-Neutrality And The Research Of Chinese Monetary Policy Validity

Fiscal policy and monetary policy are Government's main macro-control means. Monetary has becoming more and more favored by the central government due to its flexibility. At this stage, Chinese government mainly take the monetary policy of modulating currency supply to regulate and control macroeconomic, stabilize currency value and thus to further promote economy. Foreign academics have been studying on the relationship between currency supply and outputs prices for a long time. In recent years, Chinese academics have gone deep into the theoretical analysis of this issue, and they tend to develop this research by empirical analysis. However, owing to the differences of measurement means taken, sample interval chosen, target selected, data processed as well as other sectors, Chinese academics have reached different conclusions. Hence, it is meaningful theoretically and practically to study on the relationship between Chinese currency supply and outputs price for the past 10 years.In the first part of the thesis, the author summarized the theories of currency neutrality and non-neutrality. Next, the author set up the money-output vector auto-regression model, using co-integration test and Granger's cause-and-effect test to analyze the relationship between money supply and real output based on Chinese quarterly data from 2000 to 2008. The results show that there is a co-integration relationship between money supply and real output, and that money supply is the Granger cause of real output. These indicate that money is non-neutral in China and that money supply is an important instrument of central bank to regulate economy macroscopically. Therefore, the government should take the currency monetary policy which adheres to the money supply capacity of intermediate goals, focus on monitoring broad money M 2, and also put emphasis on the interest rate.In the last part of the thesis, the author summarized the development of domestic and foreign monetary policies compared the advantages and disadvantages of currency supply and interest rate as the intermediate goal of monetary policy. The author also pointed out that it is practical and realistic to take the money supply as the intermediate goal of Chinese current monetary policy. Besides those, the author gave some detailed measures on how to enhance the validity of Chinese currency policy.