Capital Markets On The Choice Of Monetary Policy Intermediate Target

Since 1990's China's capital market has been growing rapidly, which plays animportant role in the development of the economy and the allocation of resources.What's more, the development of the capital market has caused the profound reformof China's financial structure and brought new challenge for central bank to frame andimplement monetary policies. This paper uses the time series data monetarydemand(M2), total value of the stock market, GDP and interest from the first quarterof 1995 to the forth quarter of 2005 to analyze the relation between monetary demandand total value of the stock market with co-integration and error correction model.The paper intends to analyze the long-term equilibrium relation and short-termdynamic equilibrium adjustment. The research results indicate that there areco-integration relation between monetary demand and total value of the stock market,and that capital market represented by stock market has affected China's monetarydemand greatly. This paper also indicates GDP is still the main influencing factor onmonetary demand. Therefore, China's medium target for monetary policy shouldemphasize the challenge that the development of capital market has brought and thecriteria of medium target for monetary policy should be adjusted and improvedaccordingly. However, it shouldn't be denied that monetary demand be the mediumtarget for monetary policy nowadays.