The Definition Of Excess Liquidity, Monitoring, And Monetary Policy Choice

This paper which is based on the monetary policies set by central banks discusses how to boost the economic growth and stabilize the price level through monitoring and managing liquidity. The author reviews the liquidity that central banks should monitor and the excess liquidity. It is defined in this paper that liquidity is the realizability of all the realizable assets in the whole society. Realizable assets consist of the monetary supply created by the banking system, tradable financial assets, realizable physical assets (such as real estate) and etc. If there is excess amount of realizable assets and the ratio of monetary assets is too high, the realizability of the total asset will be far beyond the development of the real economy and financial markets, which leads to irrational investment at the micro level. Therefore, liquidity cannot naturally revert to the equilibrium level. We regard this situation as excess liquidity. Furthermore, it is proposed in this paper that interest rates and the term structure of interest rates are better liquidity monitoring indexes, since they can simultaneously reflect the changes of multiple variables in the real economy and financial markets. Last but not the least, the author suggests that we should replace the current intermediate target of the monetary policy with interest rates, and incorporate the volatility of asset prices into the implementation target of the monetary policy as supplement.