The Research On Influencing Factor And Prediction Of Money Multiplier In China

In order to achieve the national macro-control to promote employment, keepgrowth and price steady and balance the payments a deep research of money isnecessary. In fact the key to achieve the macroeconomic objective is the adjustmentof supply and demand, while the macro-intervention policy is mainly working on thedemand side. As the market demand is the demand with currency as a carrier, so it’sthe regulating of money supply necessary. The research of money issues are graduallyshifted from the demand of money to the supply of it. In recent years China’seconomic and financial system are restructuring which adds the complexity of moneysupply, so, the theory of money supply is also furthered.The core concept of money theory is the money supply which depending on thestatistic scope is generally divided into M0, M1, M2. M0means cash (currency)supply.M1on the basis of M0also includes demand deposits called narrow moneysupply.M2on the basis of M1also includes time deposits called broad money supplyand of course with the more liquid assets can be included the M3, M4can also bedefined, but now M0, M1andM2are more widely used.Money supply is equal to the product of base money and money multiplier, and thebase money is equal to the total cash in circulation and reserves combined. It isgenerally believed that the central bank can directly control the base money, andtherefore the prediction of money multiplier is the key to money supply control. Money supplies of different statistic scope have its different money multiplier.According to the concrete practice of China’s economy, the general money multiplierm2is better than the narrow money multiplier m1in reflecting China’s macroeconomic performance; therefore in this article the analysis and forecasting areall based on general money multiplier m2.There are two methods of prediction of the money multiplier. The first is based ona theoretical model of the money multiplier, which first analysis and predict thefactors of money multipliers and then use each forecasted factors to calculate themoney multiplier, which also called structural method. The second one just startsfrom the money multiplier itself and then establishes time series forecasting model,which needs high quality statistics. This paper analyzes and compares the twomethods and states the shortcomings in the structural method and the advantages oftime series ARIMA model. In fact the Internet financial development to which degreewill impact the existing trading habits remains to be seen, and it will surely bring bigimpact to the money supply and prediction of money multiplier. Financial innovationblurred the boundaries between assets which make structural method fail to work;well ARIMA time series model can evade this difficulty to overcome the problems. Inthis paper, ARIMA model is used to predict the general money multiplier, withstatistics of2004-2013, examining whether the money multiplier in this period can bepredicted by its own regulation in order to know whether the money supply continuesto act as an intermediary monetary policy.Based on the features of our actual money multiplier and the actual situation of ourdeposits, the saving deposits are included in time deposits and current deposit,simplifying the original model, thus emphasizing that financial innovation blurredthe boundaries between liquidity assets which is the main difficulty of structuralmethod and show the advantages of time series models. This paper will use FactorAnalysis Method to analyze the changes of money multiplier qualitatively and timeseries models for quantitative prediction of the money multiplier.On the issue of the stability of money multiplier, literature views are not uniform.At present, especially in this financial structure transiting period, China ’s reform is deeping with the economic structure adjusted, this paper is mainly focused onwhether money multiplier is still stable and predictable or not. China’s moneymultiplier is predicted in this paper, using time series ARIMA model for the firstquarter of2004to the fourth quarter of2013.Based on the simulation results obtainedfinally, further analysis of stability and predictive accuracy of multiplier, andimplications of China’s monetary policy are stated.