The Excess Money In China Economic Development: Reason, Measurement And The Police Choice

Since the late 1970s, China implemented economic reform and open policy,Price, unemployment and economic growth have been the important goal of the macro-control of monetary policy, Dramatic price fluctuations has always been the issue accompanied with the rapid growth, Behind the economic growth and price fluctuations, we found that China's money supply and demand situation has been significantly changed, The stability of the Money demand function, as well as the foreign exchange control system, which make a great impact on money supply function, is gradually becoming China's important issue in the monetary policy regulation. Under the comparisons and judgment on money supply and demand conditions, we found that compared to the empirical estimated money demand function, China's money supply has a significant exceeding quota over money demand since the economic reform. The effectiveness of monetary policy is closely related to the excess money.This paper makes several positive test on Wicksell balanced model, exogenous money supply model and non-equilibrium model, which confirmed that there exist excess money phenomenons in China's economic development. At the same time, the estimation on different levels of money demand, money supply as well as non-equilibrium model shows that there is a quite conspicuous phenomenon in M2 if we set the standard on the comparative between money supply and money demand, while for M1; there is not too clear evidence.More theoretical analysis and further tests revealed that the formation of the excess money not only related to the foreign exchange management system but also inseparably to the micro-economic behavior. When analysis on the excess growth in M2, we find that the quasi-monetary play a very important role. On the one hand, the current foreign exchange system mandatorily sends foreign exchange to the monetary authorities, which promote the foundation currency growth rapidly. On the other hand, economic and social institution reform has stimulates the micro-economics produce a strong uncertainty on the future income and expenditure. But the non-imperfect financial system has greatly restricts the micro-economic's availability of money. As a result, the uncertainty and liquid constraint which arising from the economic and social reform has become the important reasons for the precautionary savings. This further promotes the quasi-money and thus led to the appearance of the excess money. The existence of the excess money in China has posed a severe challenge to the effectiveness of monetary policy, in order to the effective realization of monetary policy on prices, unemployment and output control, the monetary authorities must implement effective control on the money supply, at the same time, money, price and output must exist stability statistical relationship, This is the main basis of the effective money regulation and control if we let money supply as intermediary objectives of the monetary policy. But in China's economic development, Pegged exchange rate system, the mandatory settlement system and the micro-economic's liquidity constraints and preventive savings have enhanced money supply endogenous, thus promote a lot of excess money, Weakened the ties between the money, prices and the outputs.The formation of the excess money are inseparable to China's economic reformation, From a long-term point of view, the completely solution to excess money in China economic development may be to reform our foreign exchange management system, and enhance the level of China's financial services. Judging from the current situation on the economy, to reduce the impact of the excess money to China's economy, we should make the monetary policy compatible with other policy instrument, as well as improve the micro-econmoic's consumption, investment and saving behavior.