Financial Control And Monetary Expansion In Institution Transition Economy

In the process of system transiting, there appeared a lot of special monetary and financial phenomena in China. One typical example is fast monetary expansion that appeared since 1980s. From 1993 when the M2/GDP began to exceed 100%, the ratio became higher and higher and to the end of 2009 it got to about 172%. This situation is called massive monetary margin by western scholars (Zhang,2006). Nevertheless except the later 1980s when serious inflation happened, in most time of transition price system was kept stable and no great monetary frustrations and crisis happened like South America. At the same time Chinese financial development did not follow the order rule from simple financial instruments evolved to the complicated. Capital market firstly was established before money market, fundament of the whole financial system, was set up firmly. It is always said Chinese stock market just took ten years to achieve establishment that had taken Western countries 100 years. From the perspective of quantity, China experienced a period when money and finance expanded greatly (Peng,2002).Nevertheless on the other hand, during the process of high monetary and financial expanding, from the perspective of quality and financial structure, financial system that is controlled by government is still centralized:un-independent central bank, state-owned commercial banks, bond market composed of national bond and so on. The firmly financial control leads to many problems such as fiscal monetization and bad debts monetization. Therefore there appears a dilemma that both fast monetary and financial expansion and strong financial constraint happened at the same time. It resulted in many problems that can't be explained by traditional theories. For example, according to monetary quantity theory some money must lost in the case price is stable with high money stock, so where is the lost money? According to financial development theory capital market should be established after capital is accumulated enough to some degree (Bose,2005). However Chinese capital market was built up in the early stage of industrialization and achieved great development. We might as well ask which path Chinese monetary expansion follows under strong financial control, whether path dependence works and what order Chinese financial development and liberalization should obey and so forth. This paper tries to analyze these problems in a united framework where system transition and financial control coexist. The creation of our paper is that we incorporate and model government endogenously that is considered as the leader of both transition and monetary and fiscal administrator. From this logic there must be some internal relationship between system transition path and monetary expansion path. If in the period when institutional change gains great revenue monetary expansion enforces the level of monetization and financial development, the raw money growth might lead to series of serious results when the revenue of institutional change decreases. Unfortunately government might indulge in the path where monetary expanding stimulates economic growth. In this paper we study the unique process of monetary expanding path in transition system and the monetary expansion path under financial constraint and society welfare concerned from these issues.In chapter 1 we conclude and reorganize three studying frameworks of monetary economics and abstract some methods and ideas to build theoretical foundation for the paper. Furthermore it involves not only modern monetary economics issues but also evolution of the past study works including different framework for money research. It is known that there too many confusions and arguments about methods of monetary economics, for example money is transaction intermediate or value storing asset, neutrality or un-neutrality, natural interest rate or market interest rate, adaptive expectation or rational expectation. All different arguments seem to be plausible in some practical context. From traditional Philips curve to improved Philips curve added expectation, this process of evolution reflects variety of reality and the studying road from statistic to theory, from intuition to ration. We could find more examples from the history of monetary economics such as decline of classical quantity theory and restatement by monetarism; criticism of Walras-Hicks-Patinkin tradition and reemphasize of neo-monetary economics. Monetary economics never lacks dispute of schools and creeds. When monetarism goes to decline and neo-Keynsism becomes government economics, it is shown that monetary economy is still implicit and profound and monetary policy still leads to results monetarism predicts. Therefore it is believed that single monetary theory and method can't produce satisfied answers for all questions. It might be too stubborn to stike to single methodology of Keynesianism or Monetarism but not keep mind open to philosophy. Moreover it would forget history and lack logic and Humanistic Concern if ignoring and misunderstanding Maxism. Therefore from beginning of the paper, we sum up three theoretical frameworks of monetary economics and draw a conclusion to collect mainstream methods and arguments. China takes only tens of years to establish monetary economy that had taken westen countries about hundreds of years. Therefore we should study Chinese monetary economy basing on a much broader perspective and avoid intuitive experiential analysis.Chapter 2,3 and 4 explore theoretical reasons of monetary expansion under strong monetary control respectively. To investigate the mechanism we study the financial aspect of transition economy from early stage of transition in chapter 2. In this economy system, market liberalization just begins and government chooses gradual and partial institution change. We assume that institutional transition leads to economic growth and increase of national income. Accompanying with the increase of income the demand of money and financial asset grow too. However because no private finance market is derived from poor capital accumulation economic condition, dominant power government holds results to massive monetary surplus. In this macro-financial situation individual can't establish Fisher Separation and arrive to the social production frontier. Therefore outside money government supplies plays an extreme role to provide private economy with exchange intermediate and value storing asset. Because no efficient financial market mechanism that time, government usually took money as a popular tool to interrupt macro-economy.In chapter 3 we explore monetary expansion under strong financial control that could be seen as conflict between money quantity and structure from the perspective of seigniorage maximum. Three models are introduced:Bailey model, Fry-Dwyer model and government investment and seigniorage model built by us. Bailey model investigates outsider money expansion motivated by government seigniorage revenue maximum. In this model government who seeks for seigniorage maximum would exert some policies to restrict and discourage private financial instruments that are the replacers of money and lead to financial restraint. Fry-Dwyer model that considers effect of bank property structure and bank behavior to seigniorage extends outsider money to portfolio composed of insider and outsider money. The model points out that the structure of bank property and industry and money demand effect monetary expansion drove by government. The model built by this paper tries to take both personal purpose and public political reputation including institution production and public production investment into account in a framework of extended utility function. This model might be closer to practice for we take seigniorage not as political purpose but financial tool.Resorting to micro-foundation model chapter 2 and chapter 3 build we set up a simple general equilibrium model where we explore monetary expansion, the equilibrium and its stability in transition system through incorporating double roles that are host of institutional change and money authority into GSM monetary system. It is found that government optimal financial method is issue fiat money that provides transition system with not only fiscal fund but also private fund to meet endogenous money demand. However after transition is established if there exists path dependence that economic grow is drove by institutional change, the long-term equilibrium is not stable. Moreover the economy stability and affect of monetary expansion to stable economy is determined by monetary control held by government, which is a challenge to financial reform.In chapter 5 and chapter 6 we study effect of monetary expansion under financial control to economic stability. In chapter 5 we analyze how the lag of financial market reform and state-owned financial property affect the process of marketization. Furthermore it is shown that monetary expansion motivated under institutional discrimination increases state-owned asset that has much lower productivity. We investigate the reason and the relationship between money quantity and macro-property structure by classifying different sectors basing on asset balance sheets in a temporal equilibrium time point. It is conclude in chapter 5 that the monetary expansion path developed according to property right preference by government is not helpful to private economic growth. The institutional discrimination is resulted from the delayed financial reform.It proceeds along the path institutional transition and economic growth and investigates how government arranges financial development path and how monetary expansion affects the path and relevant sequence resulted from this context. According to evolvement economics of finance, when economy grows and capital accumulates to some degree and technique that has scale economy appears, the inferior financial instruments that are used for short term finance and simple risk hedge can't coincide with the financial situation. Now demand for advanced financial instruments increases and there would be an endogenous power to enhance financial development. Nevertheless in a financial system led by government, the path of financial development government chooses might not coincide with the path of endogenous development. In this case the financial growth order is different from that traditional financial theory implies. At the same time we also discuss about the monetary expansion and financial growth under financial control to the stability of transition economy.In chapter 7 and chapter 8 we study empirically relevant money and finance issues in the process Chinese market liberalization basing on theoretical model build previous chapters. Chapter 7 describes the process of Chinese monetization including commodity market and factor market, and then measures seigniorage of Chinese government grabs according to the relevant theory and show the use of seigniorage by observing commercial bank data. From the empirical work it is found that because commercial banks belong to nation, Chinese government grabs broader seigniorage base including both outsider money and inside money and a great many monetary resources are allocated in state-owned corporation and subjects. Chapter 8 investigates empirically the macro-sequences of monetary expansion under financial control and found that because of strong financial control power the massive money stock might lead to potential danger to macro-stability, including inflation or asset price bubble. The volatility of monetary growth also generates bad effect to economic stability. All empirical results might shed light on the monetary policies for monetary authority. In chapter 9 we conclude the whole paper and put forward research expectation.In a word, this paper studies reasons and sequences of fast monetary expansion under strong financial control in system transition economy and tests relevant theoretical arguments using empirical methods.