The Empirical Analysis Of The Impact Of Central Bank Bills' Circulation On The Money Market

Since 1994, China's international balance of payments showed a double surplus in current and capital accounts which give rise to a considerable increase on inforeign exchange reserves. However, China's foreign exchange system required that the foreign exchange earnings under the current account should sell to the designated foreign exchange banks unconditionally, while, foreign currency balance must also be uncovered by the latter in the foreign exchange market when exceeded its limit positions. So there is a substantial increase in foreign exchange in the market, and the central bank must absorb the excessive foreign exchange and thus be forced to put the local currency in order to maintain exchange rate stability. For hedging the increased base money bought by the foreign exchange, the central bank had to reverse the open market operations to reduce the base currency, and this is the central bank's historical mission in case of numerous disadvantages in the bond case.Since 2003, the central bank became a main monetary policy tool in open market, and compared to other monetary policy tools, it is characterized by quick, flexibility, mobility and strong reversibility. The central bank controls the monetary base through the issuance of central bank bills, thereby regulating the money supply, while the changes in money supply will make the central bank respond to regulate the market by the central bank bills. However, with the central growing volume of issuance and the acceleration on distribution frequency, it exposed more and more problems. Some people think that there is a contradictory between the influence of Central bank bills on the liquidity of financial institutions and the base money demand of economic operation, while others think a gradual increase in the amount of interest payments may affect the liquidity of the financial system when the central bank hedge base currency, some studies have shown that the cost of central bank bills on hedging is so high that it could lead to economic "stagflation" phenomenon. The paper believes that the reason for the question on central bank bills is reasonable on the one hand, while, maybe these shortcomings are not inherent in central bank bills, it is a common character of all the debt security in open market. It is not the right time to replace the central bank bills until whole economic environment changed. In the short term, based on the characteristics of China's current monetary system, central bank bills still has an extremely important role on regulating monetary market, its spillover effects can not be ignored, and can not be replaced in the long term.The thesis of this paper is the research on the relationship between central bank bills'circulation and the narrow and broad money supply with the methods of normal analysis and empirical analysis. Normative analysis is divided into two parts, one is the impact of the central bank bills'circulation on money supply, and the other is the impact of central bank rate on the money market interest. In empirical analysis part, we will make use of VAR model (vector autoregressive model), Granger causality test to find the co-integration and causal relationship among central bank bills'circulation, the narrow and broad money supply and other related variables such as base money, interbank interest rates. From the above analysis, we try to prove that, from the time when the central bank bills generated, it has played a key and effective role in regulating the money supply in the money market.