Neutral Or Non-neutral Nature Of Money: Theory And Empirical Research Of China

Since the1997Asian financial crisis, as Financial Services Modernization Act ofthe U.S. was promulgated, international financial markets appeared to developunprecedentedly, the innovations of multiple financial instruments made internationalcapitals show more and more features of profit-seeking, and the integration ofinternational financial markets brings Emerging Countries such as China morechances, while deeply impacts financial markets of these countries. Since joiningWTO in November, our country was experiencing more severe tests brought byincreasingly complex international financial markets and economic situation changes.Review the history of China’s monetary policy operating, People’s Bank of Chinaalways set high growth and low inflation as the optimal objective, but it seemed theeffects became not so satisfactory. In particular, U.S. Financial Crisis put serious andfar-reaching affects to the global economy, PBC found it more and more difficult toformulate and implement monetary policies.In the final analysis, whether money is neutral is the premise and key ofmonetary policy implement. Further said, the monetary neutrality issue tightlyconnects to the issue of how to effectively operate monetary policies. So it’s necessaryto study China’s monetary neutrality issue in depth. This paper, just based on thebackground, setting China’s monetary supply as the study object, study China’smonetary neutrality issue with theoretical and empirical methods. Firstly this articlewill review monetary neutrality issue in theoretical approach, and separately elaboratethe theories of monetary neutrality and non-neutrality, then inducts and compare theexisting theories about monetary neutrality, and then conduct an theoretical andempirical study by the actual situation of China’s monetary polices, at last givecorresponding proposes according to the results of the empirical study.Specially, this paper is structured as follows,Part1the introduction, mainly inducts the background, related literature, writingidea and innovations.Part2introduces the theories of monetary neutrality and non-neutrality,enveloping monetary neutrality theories, monetary non-neutrality theories andtheories which supports money is either neutral or non-neutral.Part3analyzes China’s monetary neutrality issue, extends this paper’s viewpointand detailed explanations, at last deduces money in China is non-neutral in short-time while neutral in long-time.Part4utilizes related data of China, by Unit Root Test, VAR model,Cointegration Test, VEC model, Granger Causality Test, Impulse Response Function,Variance Decomposition and other econometric methods to do an empirical study forChina’s monetary neutrality issue.Part5analyzes the result of the empirical study in Part4, and then gives thecorresponding proposes.