| Since the reform and opening up,China's economy has been rapidly increasing and its monetization has been deepening.The money supply plays an important role in China's monetary policy.In 1996,the People's Bank of China explicitly identified the money supply as the intermediate goal of China's monetary policy.The money supply indicators can be seen as a "wind vane" of monetary policy.However,the M2 growth rate was significantly higher than that of nominal GDP in most years,which led to the continuous rise of M2/GDP in our country,exceeding 2.0 by 2015 and well above the level of 0.9 in the United States in the same period.Due to the rapid M2 growth year by year,until April 2017,our M2 stock has exceeded 159 trillion RMB,ranking the first in the world.In general,excessive currency issuance will cause inflation,but the rapid growth of China's money supply does not lead to a corresponding degree of inflation.Many people are generally worried that the inflation effect will only be accumulated.Perhaps one day,it will be concentrated in the form of inflation or financial crisis.This is the question of whether the current currency is over-issued which is widely discussed in our country.The question relates to how to understand the proportion of China's currency and GDP.Based on the data of IMF?CEIC?BIS databases,this paper studies the impact of monetary demand from the perspective of financial innovation and direct financing by using the "from general to specific" dynamic modeling method in order to reasonably explain the high proportion of M2 and GDP in China.Firstly,this paper reviews the theory and empirical research on monetary demand,and discusses the determinants of the money demand.At the same time,we also review the current research on the ratio of M2 to GDP in China.By reviewing foreign literature,we can find that our country ignores an important factor in the study of the high M2 and GDP: financial innovation.Secondly,this paper constructs a monetary demand function including financial innovation based on the shopping time model,and takes the ratio of low liquidity and high liquidity assets as the variable to measure the degree of financial innovation.It proves in theory that the improvement of financial innovation will be effective reduce the money demand,the model is the theoretical basis of this study.Thirdly,we review the history of China's banking industry,discuss the status quoof China's banking industry from the perspective of banking supervision,and summarize important financial product innovations between China and the United States.It finds that although China's banking industry has been established,it has made important progress.However,due to the late development of financial innovation in China,there is still a great gap compared with the United States.Fourthly,this paper constructs two financial innovation indicators: M2/M1 and total liquidity/M2,to study the impact of two levels of financial innovation on M1 and M2 demand respectively.Empirical results show that:(1)For the M1 equation,the income elasticity of demand for money is 1.305,indicating that for every 1% increase in revenue,the demand for money increases by 1.305%,the result shows that the increase in income will cause a greater increase in demand for money.Therefore,under normal circumstances,M1/GDP will continue to increase with economic growth,the reason why China's M1/? ? GDP level has not continued to rise is that there is another significant factor in curbing money demand :financial innovation;(2)the financial innovation coefficient measured by M2/M1 is 1.735,indicating that for every 1% increase in financial innovation,the demand for money will drop by1.735%,indicating that the financial innovation measured by M2/M1 has a significant inhibitory effect on the M1 money demand.Therefore,China's M1/GDP does not continue to rise;(3)For the M2 equation,the income elasticity of money demand is1.09,indicating that for every 1% increase in income,the demand for money will increase 1.09%.Similarly,for M2,the increase in income will bring about a greater increase in money demand.Different from the change in M1/ GDP,M2/GDP in China will continue to increase,it depends on the inhibitory effect of financial innovation on the demand for money;(4)For rate of the total liquidity/M2,the elasticity coefficient is 0.273,indicating that for every 1% increase in financial innovation,the demand for M2 will decrease by 0.273%,showing that M2 level financial innovation has a weaker effect on M2 demand,which reflects the fact that our country's liquidity is more underdeveloped in a broader sense,resulting in the continuous rise of M2/GDP in our country.Fifthly,this paper constructs the index of direct financing proportion,discussing the impact of capital market development on China's monetary demand.The result shows that the elasticity coefficient of direct financing proportion is 0.091,which shows that the proportion of direct financing is statistically significant to curbthe demand for money.Therefore,the empirical results show that increasing the proportion of direct financing may not play a significant role in reducing the proportion of M2/GDP in our country.Further,we put the interactive items of direct financing proportion,financial innovation,financial innovation and direct financing proportion into the M2 equation at the same time.The empirical results show that none of the interactive items of direct financing proportion,financial innovation and direct financing ratio enter the long-term equation.While financial innovation is still a significant variable to curb money demand and the coefficient of financial innovation has increased significantly to become 0.76.Finally,this paper concludes that financial innovation is an effective variable to curb the demand for money in China.However,due to the slow development of China's financial innovation relative to economic growth,this means that the key factors that inhibit monetary demand are relatively weak and difficult to effectively offset the strong monetary demand brought by the growth of incomes,the government has to passively maintain a relatively fast growth of money supply,resulting in an ever-increasing proportion of M2/GDP.Although the inhibitory effect of the direct financing ratio on monetary demand is statistically significant,its coefficient of influence is low,and its inhibitory effect on monetary demand may not be as large as many people expected.Further research also found that when we put the index of financial innovation?the proportion of direct financing and financial innovation into the regression equation,the proportion of direct financing and interactive items did not enter the long-term equation,but the inhibitory effect of financial innovation on the demand for money significantly increased.This shows that raising the proportion of direct financing itself has a limited effect on the demand for money,but it can indirectly increase the demand for monetary restraint by promoting the financial innovation of the banking system.The conclusion of this paper provides some policy implications: The M2/GDP in our country is rising continuously.The main reason is that the effectively curbing money demand factors are weak,but the money demand is strong.The central bank has many policy tools to regulate the money supply,but it is difficult to affect the demand for money.We cannot judge whether the central bank has oversubscribed only by the value of M2/GDP. |
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