Analysis Of Currency Substitution's Causes And Its Impact On Macro-economy In China

Current world is an open world. Economic integration and financial integration are the background for all the countries. As a pervasive economic phenomenon, currency substitution (CS) has influenced most countries in the world. With these countries merging into the world, the issue of currency substitution becomes more outstanding. There already exist some factors to produce the large-scale currency substitution on a certain degree in China, and along with the open degree of economy continuously in increasing, this problem will exist over a long period. The large-scale currency substitution will produce disadvantage influence on the stability of Macro-economic and the effect of economic policy of China, therefore, this problem has already caused the attention of theories field.This article refers to the related theory of currency substitution, established the estimate model for the analysis of causes of currency substitution suited our country national condition, and analyze the causes of our country's currency substitution using the econometrics technology of error correction theory, and analyzed our country's currency substitution to the macroscopic economical influence further, in order to put forward the related policy proposal for the controlling of our country's currency substitution.In the first part of the paper, we introduce the present situation of domestic and foreign research about currency substitution, separately introduced from overseas and the domestic two aspects. In March, 1969, Economist of America V.K.Chetty founded the currency substitution research in"On measuring the nearness of near moneys"of"American Economy Commentary". The currency substitution question as soon as be proposed, it obtained the theory widespread approval and takes at that time. In 20th century 70's, disintegrating of The Bretton woods system causes the supplying-side currency substitution under the fixed rate of exchange gradually to transform into the demand-side currency substitution under the floating exchange rate. At the same time, the Latin American nations financial liberalization policy causes"the Dollarization"the phenomenon to be day by day serious, the many western economists established each kind of model to conduct empirical study under the open economy the currency demand theory, and has obtained one batch of research results and formed the different theory faction. The domestic scholar is Jiang Polk who research on the question of currency substitution most comprehensively and systemic, and his monograph is a book named"Currency Substitution Research"which main content is the introduction the theory of overseas currency substitution, and unified our country's the national condition to establish the theoretical model of explaining our country's currency substitution. After the real diagnosis examination, he obtains the exchange rate is the primary factor of affecting our country's currency substitution. At the same time, other home partial scholars also conduct empirical analysis for our country's currency substitution through the utilization the theoretical model of overseas currency substitution.In the second part, we first clear about the definition,the premise,degree weight standard of currency substitution and how classify currency substitution, then from the general significance, and analyze which is the initiation factor of currency substitution. Typical of monetary fluctuation of an open economy is the Currency Substitution. In economics the term Currency Substitution means when there are no restrictions imposed on the inflow and outflow of capital, a foreign currency may substitute the domestic currency's functions to a certain extent to act as a medium of exchange, as a medium of payment, as a measurement of value, and as a store of value. It may divide into the generalized currency substitution and the narrow sense currency substitution, the complete currency substitution and the non- complete currency substitution and the direct currency substitution and the indirect currency substitution and so on. The currency substitution phenomenon certainly is not a new question, it appears with our country's economy growth and the economic restructuring and it is the close correlation with them. The currency substitution produces the premise includes: Exchange rate system, currency free exchange system, domestic and foreign capital market integration degree and so on. About the currency substitution weight, generally speaking, it may divide into two kinds of the absolute value target and relative quantity the target.In the third part, we introduced the fundamental research of the currency substitution in detail, mainly is the western economist's theory research to currency substitution. These theories include: Theory of currency service production function, Theory of currency demand marginal utility, Currency demand property combinatorial theory and Theory of currency prevention demand and so on. In addition, we also introduced currency substitution function based on the West German Ross base model. Finally we elaborated whether these currency substitution theories is in China's use.In the fourth part, according to the analysis, we has conducted the research to China's currency substitution, has analyzed the currency substitution causes of China and to the macroscopic economical influence. First, in the western currency substitution theory foundation, we establish a model of currency substitution in view of our country's peculiar circumstance. Model as follows: log CSRt =β0 +β1 log Yt +β2 M 2 +β3 logπ+β4 Et +β5It+εIn the formula, CSR (Currency Substitution Ratio) expressed our country's the degree of currency substitution, expressed with the percentage; Y expresses the gross national product; M 2expresses the currency supplies quantity(Refers to the generalized currency);πexpresses inflation rate of our country(π= lcpi ? lcpi( ?1 )); Et expresses the exchange rate RMB to US dollar(End of season exchange rate, direct costing law); I t expressed the Chinese and American nominal advantage rate difference, our country interest rate is indicated with a year time current deposit interest rate, the American interest rate is expressed with an American year time treasury bill rate;εexpressed the hypothesized variable, on behalf of the system risk and other now for the influence factor which can not foresee. We collect and reorganize data according to the target in the model. Because the year data can not fully reflect the currency substitution degree the change, but collects the monthly data difficulty, therefore this article used in 1998 first quarter to 2005 the second quarter quarterly data. Then we use cooperates the entire technical, the error correction model and method and Granger causal relation examination estimates our country's currency substitution whether between each influence factor relations. According to cooperates the entire estimate result the analysis, we discovered the exchange rate is the primary factor of affecting our country's currency substitution, this result is same with ginger Polk's real diagnosis examination. Gross national product rate of increment,Inflation rate and currency supplies quantity are light negative correlation with the rate of currency substitution, Our country gross national product and Inflation rate are negative correlation with the rate of currency substitution, this possibly is as a result of the our country GDP fast growth, the public favors to the our country economical prospect, anticipated the RMB revaluation. The difference of Chinese and American favorable rate is positive correlation with the rate of currency substitution; but the influence to the currency substitution rate is relative smaller; the exchange rate of RMB to US dollar is negative correlation with the rate of currency substitution, this indicated our country's exchange rate exists underestimates the phenomenon, the exchange rate more rises, the inhabitant more can have the RMB revaluation anticipated, thus weakens degree of our country currency substitution. After the ADF examination, we obtain the residual error sequence are steady, therefore in the above association entire equation variable has the long-term association entire relations. Then we use each factor for the influence to currency substitution and the rate of currency substitution to make the Granger causal relation examination, the result tells us: The exchange rate of RMB to US dollar, the difference of Chinese and American advantage rate and the GDP rate of increment is Granger reason for our country's currency substitution rate, but the inflation and the currency supplies quantity is not Granger reason for currency substitution rate of our country.Finally we have analyzed the influence of the currency substitution to the macroscopic economical movement, emphasized the extremely vital significance to control the degree of currency substitution rate of our country.In the fifth part, according to the front result, puts forward the policy proposal. Our country relaxes controlling of the foreign exchange market, and implement measure with the legal binding force foreign exchange control. It is the counter- currency substitution direct approach.