As the inner motive force of the development of finance, financial innovation would greatly and profoundly influence the economy of one country. When the great improvement of the efficiency of the financial institution changes the composition of money supply and demand. Through the effect on the monetary market, the financial innovation influences the ability of government to control its currency circulation and therefore undermines the effectiveness of the monetary policy. In view of the important role that monetary policy plays in the national macroeconomic regulation, it is quite realistic to study the financial innovation 's influence on the effectiveness of monetary policy. This article, firstly, proposes the concept of financial innovation, and analyses its generation mechanism, then, this article obtains its conclusion with the method of analyzing in great detail how the financial innovation plays its role in the monetary market through its influence on the money supply and demand. Finally, at the last part of the article, the author provides his general idea on developing China's financial innovation.
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