Research On The Formation Paths Of Money Supply In China

Sine the1980s, most western countries have abandoned the money supply as the intermediary target of monetary policy, turned to interest rate or inflation to adjust the economy. However, in china, we don not have the condition to make this transformation, the monetary policy intermediary goal of china still give priority to M2.Therefore, there is a lot of research on the total M2and the relationship between the M2and economic variables, but less seen form the structure of the M2, namely the M2internal composition research perspective. And the structure study is not only beneficial to the central bank from aspects of the internal components of the M2to control over the total money supply, can also be conducive to the central bank to monitor the structural change in the money supply. At this moment, we cannot make the interest rate as the intermediary target of monetary policy, the only way to adjust economy is through money supply. It is particularly important to adjust the money supply accurately. In order to do so, we must first analysis the formation path of M2, M1and quasi currency clearly, weather M2is the product of credit creation or not, what factors affect the formation process of M2. We always use "liquidity preference" to illustrate the flow between M1and the quasi currency, but it is hard to measure the "liquidity preference", just though interest rate is inadequately. Therefore, we should choose a broader factor, which affect the liquidity preference to control M1and M2effectively.Based on the summary and evaluate the existing theoretical research, this paper put forward to a further discussion on the connotation of the money supply. Money supply includes not only the real purchasing power, but also potential purchasing power and liquid financial assets; it has a close relationship with the macroeconomic variables. Under different economic development background, different countries have different money supply covers. Even the same countries in different stages of development, the category of the money supply is also slightly different. However, with the development of financial innovation, the understanding of the money supply should gradually deep, the intension of the money supply will be widen.Then, based on the money supply mechanism under secondary banking system, this paper analysis the formation process of China’s money supply from the aspect of the foamation of Ml, Quasi-money, and the transformation between them. Then point out that Ml is the initial form of commercial bank credit creation, leakage of Ml form Quasi-money, M2is the monetary aggregates of commercial bank credit creation. From the structure of M2, based on the foamation of M1, Quasi-money and the transformation between them, this paper discuss the main factors and its mechanism affect the formation paths of M1and Quasi-money seperately. Using VAR model to analyze the short and long-term effects of relevant variables, and put the main factors that influence the formation path of M2into VAR model for further research. The results show that the scale of the loan, price levels, return on alternative assets and the financial deepening has a profound influence on the foamation of M1, Quasi-money and the transformation between them. Lead to changes in money supply M2. This paper also explains the impact of the foamation of M1, Quasi-money and the transformation between them on the conversion structure of money supply (M1/Quasi-money). Results show that the economy growth, price level, capital market development and financial deepening can influence the structure of money supply significantly, leading to the structure of money supply fluctuate sharply in the short-term, and decline obviously in the long-term.Finally,on the basis of the above analysis, this paper put forward some suggestions on how to control money supply effectively. Including use a variety of means to control the scale of loans, pay more attention to the role of asset price changes in the money supply, and make money supply structure as one of the intermediary target of monetary policy, set up the regulation system of money supply intermediary target wcich combined total regulation and structure control.