The Validity Empirical Research Of The Intermediate Target Of Monetary Policy

1,The main contentsIn the market economy, it often requires a monetary policy instruments which can affect the ultimate goal of the economic by the same time, the operation of monetary policy involved four economic variables:monetary policy instruments, operating targets, policy goals, the ultimate goal.the choice of intermediate target of monetary policy is directly effect the ultimate goal, which has been the research object of scholars both domestic and foreign. total credit, money supply, interest rate, exchange rate, and inflation rate can act as intermediate target of monetary policy, the intermediate target of monetary policy is not unchanged, which in accordance with the actual economic environment, different variables may selected act as an intermediate target in different periods.The general research steps are as follows:the theory of intermediate target of monetary policy—the international experience and practice—the empirical analysis of the three properties (controllability, measurability, relevance)—the VAR research to test the validity of the money supply—conclusions and recommendations.the paper include six chapters, each chapter introduces the main content are as follows:The first chapter is the foreword and introduction, first introduced the background and significance of this study, Second, to collect the current papers, described the article is based on linear correlation analysis and empirical research of the VAR model. Finally, introduce the innovation and inadequate of this paper.The second chapter is the theoretical basis of the article, specifically include: 1) the meaning and the operational mechanism of the intermediate target of monetary policy; 2) the theory of the intermediate target of monetary policy, such as Keynesian school, monetarist school, Taylor theory, Poole theory; 3) the three standards of the intermediate target and some common indicators which can act as intermediate targets of monetary policy, such as credit supply, the amount of money supply, interest rate, inflation rate, exchange rate and other indicators.The third chapter describes the international experience and the practice in our coutry of the intermediate target of monetary policy, first introduced the development process of intermediate target of monetary policy in United States, Britain, Germany, Japan, and then summary the experience. Secondly, introduce the three practice stages of the domestic intermediate target of monetary policy.From the chapter four the paper entered the empirical research, this chapter is research the three standards of the amount of money supply:1) controllability, first through the charts of China's money supply of M1 and M2 from 1994 to 2010, compared the target values with the actual values, then from the definition of money supply, the two factors of the money supply were studied; 2) measurability, the money supply can be measured from the define, but in recent years as financial market developed, the money supply become more and more difficult to measure, this section analyzed and summarized the reasons of this phenomenon.3) relevance, that is research the correlation between M2 and the ultimate goal of GDP and CPI variables.Chapter five use the VAR empirical approach to research the the validity of money supply as the intermediate target, selected the quarterly datas of GDP and CPI from 1996 to 2010, and add the disputed interest rate R,which can act as an intermediary variable in comparison, after a stable test, established the VAR model, conclude that compared with money supply, the interest rate and inflation rate is more effective to GDP and CPI.The sixth chapter is the end of the paper, first summarized the conclusion empirical study, that is the money supply as the intermediate target of monetary policy of these years is less effective, then proposed some suggestions to maintain the validity of the intermediate target of monetary policy.2 The main point of view(1) through the theoretical analysis of monetary policy and learn from experience of some developed countries, we get the following conclusions:1) in the case of early stage of economic and undeveloped financial market, we will select some quantitative indicators such as credit amount and money supply to act as intermediate target of monetary policy; 2) the choice of intermediate target of monetary policy is not static, it should be based on their actual financial environment to adjust or replace it, and take other economic indicators to make reference and auxiliary when necessary; 3) when the financial markets tend to improve and developed, it will towards to market-based price indicators as intermediate target of monetary policy, such as interest rate, exchange rate, and so on; 4) even if different countries use the same economic indicators as intermediate target, the operation is vary because of the economic and financial conditions.(2) Through the research of the three criteria of intermediate target of monetary policy, we conclude that:1) controllability, through comparing the target value and the actual value of the annual M1 and M2 data since 1994, they have a certain relationship, our monetary authorities has some control to M1 and M2. for other hand, the basic money and the money multiplier is difficult to be controlled; 2)measurability, the money supply can be measured from the define, but by the developed financial innovation, the expand of the stock market, opening up the capital and other reasons, making the measurability of currency affected.3) relevance, the research show that M2, GDP, CPI has a long-term equilibrium relationship.In summary, the money supply act as the intermediate target meets the requirements of the three criteria not good.(3) Through the VAR model study the validity of money supply, it shows that GDP, CPI, M2, R this four sequences are stability, so establish the VAR model of these four variables, then though impulse response function analysis and Variance decomposition, show that compare with M2, the relation between R,CPI and GDP, CPI is more significant.3, the paper's main innovation1) Research perspective and ideas:This paper uses empirical study methods, and tightly around the empirical study the validity of the intermediate target of monetary policy, first use the appropriate empirical method research the three criteria of the intermediate target, and then select the relevant variables to establish VAR model, the variable who is not have the stability will be removed, thus ensuring that the variable selection is reasonable. Through the research of the three criteria of intermediate target of monetary policy and the VAR model analysis, strengthening the argument, and enhance the credibility of the results of empirical research.2) Research methods:the paper use a variety of methods in researching the three criteria of intermediate target of monetary, using comparison analysis and factor analysis method study the controllability, mainly using theoretical analysis method to study the measurability, using linear regression analysis method to study relevance. The paper then use VAR approach to study the validity of money supply as the intermediate target, when establish VAR model, not only select money supply, but also select other indicators which could act as the intermediate target variables for comparison, so through empirical perspective, take the amount of money supply compare with other relevant variables at the same time, it fully demonstrate that the amount of money supply act as the intermediate target of monetary policy is less valid.