Rethinking Of China’s M2/GDP

The M2/GDP is one of the most important indicators which link one country’s monetary variables with economic variables, so since the date of birth of this index, the theorists and the monetary authorities have paid great attention on it. Because China’s M2/GDP index is extremely high, so the theoretical circles have made a lot of explanation, but this puzzle has not yet been settle. This paper breakthrough the thinking of total amount as the existing research on China’s high M2/GDP index, begins the study from the perspective of regional economic differences, establish the theoretical model of impact of regional economic differences to the whole M2/GDP, theoretical analysis shows that, compared to the balanced developed economic, the non-balanced developed economic will show higher M2/GDP index, the reason is that, the part of economic which is more blooming need more currency, which rise the overall demand for money, so there will be excess demand for money, the money supply must meet the expansion of the economy as a whole, as well as the needs of this excess demand, so the M2/GDP index will be directly pulled. In addition, for the reality of China, this paper investigates both the provincial money demand function and the money demand function of the four major economic regions, select "RMB deposit balance" to represent the demand for money, GDP to represent the scale variable,"one-year weighted average interest rate" and "static expectation of the inflation" to represent the opportunity cost variable. Provincial panel data model regression shows that the coefficients of elasticity of the provincial demand for money to GDP are significant differences. The four regional money demand function regression also show the obvious difference among the coefficients of elasticity of the regional demand for money, the coefficient of the Eastern part shows the highest value, the Western followed by the Eastern, the Central and the Northeastern are the lowest. Besides, this paper also points out that the coefficient of elasticity of the demand for money is only an indirect indicator of M2/GDP, which just shows the relationship between M2and GDP, but is still far from the fundamental factors which affect M2/GDP, the fundamental factors is the regional differences in economic and policy. Finally, this paper put forward appropriate policy recommendations based on the conclusion.