| Velocity of money, which is ratio of output or exchange number to money and links real economy with financial economy, has been a significant topic of money economics. According to Fisher equation of income type, monetary velocity determines money flow then income. If nominal income is constant, monetary velocity will determines money supply. The changes of monetary velocity should be considered when monetary policy is worked out. Moreover, the changes of monetary velocity itself are the results of the changes of macroeconomic and financial environments on the one hand, and also reflect many problems in the economy and finance on the other hand. Therefore, it has an important theoretical and practical significance to study China’s monetary velocity systematically and thoroughly. In this paper, we will analyze the velocity during Chinese economy transition, by qualitative analysis and empirical econometric analysis, through money demand and money supply. Firstly, this paper elaborates the review of the velocity of money theory, elaboration including the theoretical perspectives, theoretical results,the contribution and defects of these theories. Then, this paper making a summary of the empirical research, basing on the summary, point out the defects and problems of he velocity of money in China. Secondly, basing on the overview of the theoretical and empirical research on the velocity of money Then, this paper introduced the definition of several velocity of money, selected the velocity of money income as velocity of money argued and calculated in this paper, then described and demonstrated the short-term fluctuation and long-term trends of velocity of money in China. For long-term trends, from 1978 to 2010, the velocity of MO dropped from 17.2% to 8.9%, decreased by 48.3%, the velocity of M1 dropped from 3.6% to 1.5%, decreased by 58.3%, while the velocity of M2 dropped from 3.1% to 0.5%, decreased by even as much as 83.9%. Therefore, we could see that the velocity of money kept a sustained stable declining situation. In the short term, this paper applies related concept of the economic cycle for analysis, and the result s show that fluctuation of velocity of money have procyclicality both along the economic cycle and the inflation cycle. Then, this paper compared changes on the velocity of money in the major foreign countries in the same period, trying to find their common characteristics and differences. Finally, after having explained the factors that affect the velocity of money (mainly qualitatively) and revealed the features of velocity of money, the author tested the influencing factors on the change of velocity of money in China, which is the core content of this paper. In this paper four variables, including broad money, financial development, change in industrial structure and stock market trading volume are selected, then the author uses several econometric methods such as Granger causality test, unit root test, cointegration test etc. to analysis the factors that influence the velocity of money trend in China quantitatively. The results show that the velocity of Ml and the degree of financial development are positively related, the velocity of Ml and the stock market trading volume have a negative relationship. The circulation speed of M2 and the degree of broad money are in negative correlation, the circulation speed of M2 and the flow of the industrial structure have a negative correlation. And the degree of influence in four factors is varying in four factors. Then the author did economic explanation to the result of model, and analysed the ways they influence velocity of Money. |
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