China's Broad Money Multiplier Empirical Analysis (1996-2010)

Since recent, central bank played the increasingly important role of macroeconomic regulation. As one important indicator of monetary policy, the money multiplier directly reflected macroeconomic development and financial reform process in China. Analysis of the factors which affect the money multiplier movements helped improve monetary policy effects.This paper studied the feature changes of broad money multiplier in China's, and further analyzed the impact factors of the statutory deposit reserve ratio, the excess reserve ratio and the ratio of cash. This paper first established the cointegration equation between broad money multiplier and the affecting factors, using the AR (1) modifying serial correlation of cointegration equation residuals. It verified the negative effects of the above three factors on broad money multiplier, and picked out the biggest factors—excess reserve ratio. Secondly, excess reserve ratio of variable was analyzed with principal component analysis, reaching the external economic environment factor and the internal economic factor. Regression results showed that China's current internal and external environment impacted on the bro-ad money multiplier negatively. Finally, the paper proposed the appropriate policy recommendations based on the above analysis:redesigning reserve system, speeding up the process of interest rate marketing and strengthening the use of price-based monetary policy instruments.