Analysis On The Validity Of Money Supply As The Intermediate Target Of China

The effectiveness of monetary policy has been the long-term concern of domestic and foreignfinancial circles and the monetary authorities. The use of policy instruments, the choice ofintermediate target and the final definition of objectives, such series of work will affect theeffectiveness of monetary policy. Accurate selection of the appropriate intermediate target ofmonetary policy is an important link to achieve the ultimate goal of monetary policy, because it isthe financial variables that monetary authorities used to observe the ultimate effect of the monetarypolicy, it be acted on Operational objectives and ultimately impact on the policy objectives, in theentire monetary policy transmission mechanism serve as a link between past and future.Interest rates, exchange rates, inflation targeting and monetary summary and so on are all thechoice of intermediate target. But different times, different choices. It depends on themacroeconomic environment, only under certain conditions, such as appropriate transmissionmechanism, independence co-ordination of central bank, can the intermediate maximize theadvantages. Intermediate target as the financial variables, need to meet the testability, controllabilityand the correlation with the ultimate aim either.Seen from the evolution of the intermediate target of Western developed countries, it has gonethrough the interest rates to money supply to interest rates such a process.Under the early plannedeconomy, our country takes the credit scale as the intermediate target, but along with the arrival ofthe market economy, the size of credit as the detection object can no longer allow the central bankto track the effects of policies. Since1998, our country determined the money supply as theintermediate target.Nevertheless in the1990s, western countries gave up the money supply as an intermediatetarget one after another. Macro-environment of China have changes a lot get along with thefinancial innovation continuously, some scholars have questioned the effectiveness of the moneysupply as the intermediary goals.Based on the existing theoretical analysis and findings, the paperanalyzed the controllability and testability of the money supply in China. Using the unit root test, co-integration test, pulse effects and variance decomposition, the forefront of the test methods toanalyze the Quarterly data from1998to2011, empirical analysis of the explanatory power of thedifferent levels of money supply to GDP and CPI, that is the correlation study. Conclusions are asfollows:Central Bank of China can still get the accurate data of money supply, the testability is high.The impact of bank upon the controllability of the monetary base results in the fluctuations ofMoney multiplier. Controllability of decline; the correlation between M2and GDP and CPI arestronger than the R, Correlation is stronger than R between M1and GDP but less than R betweenM1and CPI.Overall, correlation of the money supply as an intermediate target is strong. Theoreticaland empirical analysis shows that China should continue to use money supply as the intermediatetarget.