Research On China’s Currency Policy: How To Choose The Intermediate Target

Monetary policy, as an important economic tool to correct the macroeconomic failure, mainly consistsof four parts within its operating framework: Monetary policy tools, operating target, intermediary targetand ultimate targets; however, as the monetary policy mechanism has the disadvantage of hysteresis andmutability, monetary policy tools can not directly impact on the ultimate goals, only to measure itseffectiveness through the economic variables which promptly reflects the economic changes, so that themonetary authorities are able to modify their monetary policy conducts in due course. This set of variablesmentioned above are the intermediate targets of monetary policy. Therefore, the appropriate selection ofmonetary policy intermediary target is of great economic significance to the effectiveness of a country’smonetary policy.This paper first of all introduces the background and significance of China’s monetary policyintermediary target research, then the definition and selection criteria of the target. On basis of theintermediary target selection standard, we test the validity of China’s current monetary policy intermediarytarget, i.e. money supply, but to find that the effectiveness of money supply as intermediate target is notideal. The author also, based on China’s national conditions, explores the feasibility of its monetary policyintermediary target change, but through the analysis he finds that our country at present stage does not havethe condition to change the intermediary target, thus using "suboptimal choice" in the absence of "optimalchoice ", that is to say, China should now continue to use money supply as the intermediate target ofmonetary policy. Finally, this paper analyses the reasons for suitability declination of money supply fromthree aspects: measurability, controllability, and correlation. And according to those, it puts forward thecorresponding countermeasures and suggestions to improve the effectiveness of money supply as themonetary policy intermediary target.Some conclusions are drawn in the paper as follows: the validity of money supply as the monetarypolicy intermediary target in China is declining gradually, the measurability and controllability of which ispoor, the correlation with the ultimate goal not high; China’s economic and financial environment at presentare not good enough for its intermediary target change, let alone interest rates and inflation targeting system;Social financing scale, owning to its inherent defects and poor controllability statistically, cannot be as theintermediary target of monetary policy either; In the long run, as China’s economic and financial situationchanges, the intermediary target of monetary policy in China is bound to adjust, but in the short term, Chinashould also continue to use the money supply as its intermediate target of monetary policy while at thesame time complete the corresponding supporting measures: improving the independence of the centralbank, enhancing flexibility of the exchange rate regime, expanding the statistical caliber of money supplyand adopting the new monetary quantitative index, so as to improve the effectiveness of money supply asintermediate target.