Research On The Intermediate Target Of Monetary Policy Of Our Country-from The Financial Innovation Perspective

The flood of financial innovation comes since Citibank introduced CDs to themarket in1961.The development of financial innovation makes the global economygrow rapidly, but meanwhile, it brings a dilemma to the monetary authorities whenthey choose the intermediate target of monetary policy. Financial innovation growsrapidly in China after China’s reform and opening-up. Under the background of someEuropean countries and America gave up money supply intermediate target, Somescholars think that China should give up money supply as monetary policyintermediate target when the effect of money supply is not ideal. But these scholarshaven’t make a concrete study on the development of China’s financial innovationand its effect on China’s money supply intermediate target, so studied thedevelopment of China’s financial innovation、its effect on China’s money supplyintermediate target and whether money supply is continue to be proper as China’sintermediate target of monetary policy.First elaborate the effect of financial innovation on the intermediate target ofmonetary policy. Then describe the development of financial innovation in China. Inorder to analyze the effect of our country’s financial innovation on money supply andwhether money supply is continue to be proper as China’s intermediate target ofmonetary policy, this paper uses VAR to solve these problems. The results show thatthe testability and controllability of money supply M1and M2in our country isaffected by financial innovation. The relevance of money supply with economicgrowth is affected by financial innovation in a very small extent, the relevance ofmoney supply with price stability is affected by financial innovation in the short term.The relevance of money supply with the ultimate goal of monetary policy will beaffected by financial innovation. Besides, money supply can continue to be used asthe intermediate target of monetary policy of China, meanwhile, money supply M2hasthe advantage over M1when served as the intermediate target of monetary policy.Policy suggestion mainly proposed from two aspects. In the short term, themonetary authority should perfect the statistic caliber of money supply. In the mediumterm and long run, the monetary authority should adopt the multi target when useinterest rate as the main intermediate target of monetary policy, then transit to the interest rate as China’s intermediate target of monetary policy.