Study On The Influence Of Capital Market On The Money Demand And Monetary Policy Conduct Mechanism

Money Demand is an endogenous variable, and Money Supply is an exogenous variable. One country will estimate the Money Demand in order to make a balance between Money Demand and Money Supply, then influence the national economy through an appropriate Monetary Policy Conduct Mechanism. Therefore, it's so important to establish an accurate Money Demand Function and an efficient Monetary Policy Conduct Mechanism.Since 90s, there's a big development in our capital market. Especially in 2005, the Reform of Non-tradable Shares has become a turning-point of our capital market. But nowadays, we don't take the capital market into consideration when estimating the Money Demand so that the Money Supply can't meet the real demand of the national economy. Meanwhile, the Monetary Policy Conduct Mechanism has ignored the effect of capital market so that its own effectiveness has been criticized.Through making review of the theory of Money Demand and Monetary Policy Conduct Mechanism, the paper has used methods of Theoretical Analysis and Empirical Analysis, Qualitative Analysis and Quantitative Analysis. First, the paper analyzed the influence of Reform of Non-tradable Shares and the application of"Four Effects"in China; Second, it established the Money Demand Function to analyze the influence of the variables, such as capital market, to the Money Demand; Finally, it analyzed the disadvantage of the current Monetary Policy Conduct Mechanism and the obstacle of the Monetary Policy Conduct Mechanism through the capital market. The main conclusions are in the following:Through the theory review, we found that the capital market influenced the Money Demand in four ways: Financial Effect, Deals Effect, Portfolio Effect and Substitution Effect. And three effects, which include Financial, Deals and Portfolio Effects, will increase the money demand; Substitution Effect will decrease the money demand. The co-relationship of the four effects will decide the money demand eventually. The Monetary Policy Conduct Mechanism in the capital market includes five effects: Q Effect, Unsymmetrical Information Effect, Financial Effect, Flow Effect and Expectation Effect. All the five effects will affect people's investment, consuming and expectation behavior by changing the asset price and carry out the conduction of the monetary policy. Through the analysis of the system and the theory, we found that Reform of Non-tradable Shares carried out an important change in the behavior, structure and function of our capital market. So we must put the system variable into the Money Demand Function to estimate our country's money demand accurately. The conclusions of the theoretical analysis are: 1) in our country, the influence of the Financial Effect is small. People's disposable income is low because of the small-scale capital market, bad investment income for the individuals and too much money in the bank; non-durable income from the capital market can't push people to consume; the management of enterprises is bad. 2) Nowadays, our capital market isn't mature, the Portfolio Effect will increase M1 and M2. 3) The Deals Effect can't be ignored. 4) Substitution Effect is the most obvious.By establishing the Money Demand Function and using the monthly data from 2001.6 to 2008.5, the conclusions of empirical analysis are: 1) By the Regression Analysis, we found that in the short turn, Industrial Added-value has a positive effect with M1 and M2; and Security Cash, One-year Deposit Rate and Circulation Rate have a negative effect with M1 and M2. Analyzing Dummy Variable and Circulation Rate together, we found that the coefficient of Circulation Rate in different time is different. When Dummy Variable is 1, the coefficient is small than that when Dummy Variable is 0, that means the strength of increasing M1 and M2 is stronger and stronger according to the increase of tradable shares. 2) By the Cointegration Analysis, we found that in the long turn, Security Cash and Circulation Rate have a positive effect with M1, which reinforces the idea that these two variables will increase M1 finally. 3) The real economy is the main course of the money demand, but the effect of capital market can't be ignored. At present, the strength of increasing the money demand is weak, and Substitution Effect is the most obvious. But the final result is to increase the money demand when the capital market is developing in some extent.Through analyzing the effectiveness of the Monetary Policy Conduct Mechanism, we think we must take capital market into consideration. And there's still a lot of problems in our capital market, which include: the institution investors aren't mature enough; unsymmetrical information problem is still serious, which lead to the low market efficiency; security market is small scale; there's no intense relationship between the capital market and currency market.The advises of enhancing the effectiveness of the Monetary Policy Conduct Mechanism in our capital market include: 1) Put the capital market into consideration when estimating the money demand; 2) pay attention to the financial asset price; 3) enhance the relationship between the capital market and currency market; 4) develop the institution investor; 5) carry out the marketable-rate; 6) perfect the security market system.