An Empirical Analysis Of Financial Innovation’s Impacts On Monetary Transmission Channel

This paper studies the impacts of financial innovation on monetary policy transmission mechanism by conducting an empirical analysis of the relationship between financial innovation and monetary demand. When developing the market economy, holding the faith which believe "finance is the core of the modern economy",china has made remarkable improvements in the reform of finance system、optimization of finance resources and fostering of financial markets and institutions. But there are still some problems to be resolved. For example, the innovation has been dominated by the authority, not the market participants and the whole innovation course is under restrict regulation. This paper summarizes some characteristics of china’s monetary policy transmission mechanism, including that multiple channels have come into being but credit channel still remain the most important one and financial innovation has complicated monetary policy’s implementation.To analyze the relationship between financial innovation and monetary transmission mechanism, this paper construct a model which includes both credit and money channel and put our focus on the latter. And then, this paper examines the impacts of financial innovation on elasticities of monetary demand by conducting an empirical analysis based on the annual data from 1980 to 2010 of china. The results show that financial innovation reduces monetary demand’s income elasticity and increase its interest rate elasticity. Finally, combining the theoretical and empirical results, it concludes that the financial innovation may weaken the effectiveness of monetary policy transmission. Based on the above analysis, we give some suggestions to improve the effectiveness of monetary policy.