The Study Of Monetary Approach To Balance Of Payments

Since 1994, China's balance of payments has continuous "double surplus" and accompanied by high economic growth rate, according to the view of traditional Keynesian theory, rapid economic growth will worsen the balance of payments, this does not match China. And in order to ease the international balance of payments surplus, foreign countries required the appreciation of RMB policy has not changed the status of China's international balance of payments surplus, so under the monetary approach theory, this article will test how the RMB exchange rate and economic growth can affect the balance of payments through establishing money demand function in china, and according to test results, we will propose policy recommendations to adjust international balance of payments.This paper elaborates the theory of monetary approach, it suggests that the imbalance of international payments due to the imbalance of money market, foreign exchange reserves increase or decrease due to the imbalance of money supply and money demand, that a country's rapid economic growth will lead to balance of payments surplus, the formation of the international balance of payments surplus is due to fast economic growth influence money market. Since 1994, China's sustained and rapid economic growth and continuous balance of payments surplus, this phenomenon appearance in line with the theory of monetary approach, so this article takes fast-growing economies of China and the international balance of payments surplus for example, and verify the explanatory power of the monetary approach to China's particular phenomenon.Based on theoretical analysis and empirical test, we use the data of the first quarter of 1994 to first quarter of 2010, on the basic of theoretical formula of monetary approach to balance of payments, make an empirical test on China's economic growth, domestic credit how to influence the international payments, and found that foreign exchange reserves and economic growth, domestic credit has cointegration relationship, foreign exchange reserves growth rate and economic growth rate has positive correlation, and negative correlation with domestic credit. Then establish money demand function for further analysis on economic growth influencing international balance of payments. Introducing RMB exchange rate to the demand function to test that RMB appreciation to reduce China's international balance of payments is viable or not, in addition to money demand function also includes factors of price level, interest rates and M/GDP, through cointegration analysis and error correction model of short-term money demand function, hope to find more detailed reasons on balance of payments surplus from monetary point.The results show that China's money demand and income, price level, interest rates, M/GDP and RMB exchange rate has long-term cointegration relationship, under the premise of domestic credit constant, economic growth can lead to increase money demand, then the balance of payments surplus coming; increased interest rate will lead to reduce money demand, the part money demand over money supply will outflow to foreign countries, this will improve the international balance of payments; the RMB against the U.S. dollar exchange rate exists negative relationship between money demand, that's to say, if central bank can control money supply and the rapid economic growth can absorb part of money supply, RMB appreciation would lead to increased money demand, and greater balance of payments surplus appeared.Through theoretical analysis and empirical test, we found that the imbalance of international payments is caused by imbalance of currency market, and in the period of rapid economic growth, to improve the international balance of payments surplus by the policy of RMB appreciation can't achieve the desired effects.According to the monetary approach policy proposals and analysis of empirical test results, if risk and inflation are controlled, we can use expansionary domestic credit policy to regulate international balance of payments surplus; also under the premise of domestic credit remained constant, interest rate policy can be used to adjust the balance of payments through adjusting money demand; while gradually deepening the capital convertibility reform of capital and financial account, RMB exchange rate remained stable in short-term, and gradually deepening the reform of RMB exchange rate to make RMB exchange rate more flexible, also can improve the international balance of payments surplus.