A Feasibility Study On Social Financing Scale As The Intermediate Target Of Monetary Policy In China

The intermediate target of monetary policy is the intermediate variable between the ultimate goal of monetary policy and monetary policy, which is the connecting point of the monetary policy impact on the macro economy. The correct or not of choosing intermediate target is directly related to the smooth implementation of the ultimate goal of monetary policy. Therefore, it is of great importance to the study of intermediate target of monetary policy. Especially since the2008global financial crisis, in order to save the recession, governments set off a wave of research on the intermediate target of monetary policy. At the same time with the development and changes of China’s economic and financial environment, money supply has currently been questioned by more and more people:the high level of foreign exchange reserves the central bank difficult to control the base monetary; the flourish of financial innovation, making some financial assets also play the functions of money in a certain extent, and then sparking questions about the definition and calculation of the money supply; since the start of internationalization to RMB in China in2009, which increases the range and region of RMB as money supply,which make the reasonable measure of money supply is becoming more and more complex. When the money supply is questionable, monetary authorities have put forward the concept of "social financing scale" at the end of2010. Songcheng Sheng, who is the director of the survey and statistics department of central bank, put forward social financing scale as the intermediate target of monetary policy of China at the first time in2011February. Later, economists has heated discussions on this issue, but the results of the current study exist two diametrically opposed views, and mostly based on the qualitative analysis, not the number of inspection. Furthermore most research scholars focus on whether social financing scale can substitute the money supply, few to study from the combination of social financing scale and the money supply perspective. So this paper follows the next several aspects to study this issue: Firstly, relevant theories on the intemediate target of monetary policy are reviewed which provides a basic theoretical framework for China’s choice of intemediate target. At the same time, this article from the perspective of definition to analyze the relationship of social financing scale and money supply. In one word their relationship is like the two sides of the same coin:the money supply is the statistics of the deposits of financial institutions from the liability side, reflect the liquidity of financial system provides to the society and the social level of purchasing power; the social financing scale is from assets, financial institutions issued to statistics, is the reflection of the financial system to support social capital supply. The biggest difference lies in the two indexes is the scope of social financing scale is broader than the money supply’s.Secondly, carried out the practice of foreign developed countries on the choice of intermediate target of monetary policy, such as the USA, South Korea, Germany and Japan. On the basis of their commonness, this paper obtains four points of experience by combining the current financial and economic development in China.Thirdly, this paper has a detailed analysis on the social financing scale’s controllability, measurability and relativity, which make a contrast of the money supply. Furthermore in order to make the result as accurate as possible,this paper uses the simple coefficient method and the vector autoregressive (VAR) model to analysis the correlation between the social financing scale and the ultimate goal of monetary policy.Finally, based on theoretical and empirical conclusions, some policy suggestions are given. The main conclusions of this paper in details are as follows:1Social financing scale is not suitable for direct replacement of money supply to become China’s current intermediate target of monetary policy. There are two reasons:one, social financing scale has no obvious intermediary advantage than the money supply. From the view of controllability and observability, the two indicators each has its own merits. From the perspective of relevance, social financing scale is better than the money supply in the impulse response function and variance decomposition, but the simple correlation coefficient, co integration test and Grange causality test is not superior to the money supply. But the scale of social financing as a new statistical index, whose definition and statistical also need further improvement, so this paper argues that social financing scale is not suitable to directly replace the money supply. Two, the money supply should not be given up as intermediary. From the practical experience of the developed countries, financial innovation, internationalization of the currency and other factors to impact the money supply’s controllability and actively are common. in order to maintain the effectiveness of monetary supply as the intermediary, they all according to the reality adjust the statistics of monetary, and had obtained the success, which we can use as a reference. Interest rate and inflation rate are not suitable for China’s current intermediate target of monetary policy. This is mainly decided by the basic national conditions of China.2Social financing scale is not suitable for directly replace the money supply as intermediate target of our country at present, but it is a good supplement to the money supply, which can help to improve the effectiveness of the current monetary policy. From a theoretical perspective, social financing scale can provide a more comprehensive monitoring perspective than money supply, and the controllability, measurability and relativity of social financing scale also showed certain rationality. Over more, from the overseas advanced experience, the boundaries of intermediary and operating goals become increasingly blurred, more and more countries become to choose two or more intermediary targets. the introduction of social financing scale is a realistic choice for us in the transformation of the economic situation at present. From the empirical perspective, when introduces social financing scale in the economic system, can greatly improve the co integration regression’s fitting goodness, and Grange causality test shows that social financing scale is the result of GDP and CPI, which can react very good on the effect of monetary policy’s implementation, and the impulse responses and variance decomposition shows that social financing scale performs much better than money supply, which proves this conclusion again. According to these conclusions, the following suggestions are given:Firstly, to improve its intermediary effectiveness strengthening and improving the definition and statistical caliber of money supply, based on China’s current financial situation; Second, further improving the social financing scale, to make it more scientific and comprehensive; Last but not the least, enhancing the independence and information of the central bank. Throughout the whole paper, the main characteristic of this paper lies in the following aspects:first, on the selected object. This paper studies not only whether social financing scale can replace money supply, but also from the perspective of combining the social financing scale and money supply; second, about the experience abroad, in order to make the lessons more feasible, this paper chooses South Korea as the reference object, which has just entered the ranks of the developed countries and ever had a similar and economic background of China. And summarize the common advanced experience of the developed countries from the horizontal and vertical; third, the empirical. This paper analyzes the reason of why various empirical results are inconsistent. In order to ensure the accuracy of the conclusions, the author uses a series of empirical methods to analysis the correlation between the social financing scale and monetary policy target, such as simple correlation, co integration, error correction and Granger causality test. At the same time, this paper also uses the money supply for comparison.