The Mechanism Of Money Supply In Modern Financial System

The currency issue has been the important proposition in economic study. The existing foregin studies of money have two main topics:monetary supply and monetary demand, while the domestic researches pay more attention on empirical research of monetary supply and the optimal money demand function. This paper will focus on the internal mechanism of money creation from a microscopic point of view. The modern financial system in China consists of four kinds of financial institutions: the monetary authorities, depository corporations, other depository corporations and non-bank financial institutions. On the theoretical side, this paper analyzes the mechanism of different types of financial institutions’ impact on money supply. Through the study of the central bank’s balance sheet and the base currency structure, it comes to a find that the central bank’s control of the base currency is asymmetry via monetary instruments. And the non-bank financial institutions have a stimulating effect but undirected influence on money expansion and accelerate the growth of the money supply. Then the paper establishes a decision-making model of depository corporations and other depository corporations. The model tells that these two types of institutions try to bypass financial regulatory, and lift their ability to generate money via interbank business and off-balance sheet business, which makes the monetary multipier unstable. Empirical test establishing two co-integration equations shows the high relationship of the cost of interbank business, market interest rates and money multiplier, which can provide further evidence of the conclusion that the development of the deposit-taking companies and other deposit-taking companies change the internal mechanism of monertary supply. And it is not easy for monetary authority to control broad money aggregate because of the instability of broad money multiplier. Finally, the paper proposes some appropriate policy suggestions. It is recommended that the policy-makers should insist on promoting the reform of the financial system, and to accelerate the improvement of the financial system, in order to completely solve the currency problem.The main structure of this paper as follow:The Introduction part includes the background, the main goal of the paper, the literature review both at home and abroad, research method and structural framework and key innovations and deficiencies.Chapter Ⅰ introduces Chinese currency caliber and the framework of the modern financial system.Chapter Ⅱ study two basic factors of monetary supply-the base currency and monetary multiplier, it is found that the contribution of the money multiplier money supply is rising.Chapter Ⅲ analyzes the role of monetary authorities and other financial institutions in which it is found that it is asymmetric of monetary authority’s controlling basic currency.Chapter Ⅳ analyzes the role of depository corporations and other depository corporations and tries to explain their impact on the money supply within a decision-making model.Chapter Ⅴ is the empirical part. Two co-integration equations can identify the main factors which affect the money supply and the money multiplier.Chapter Ⅵ is the summary, which provides the main conclusions of this paper and proposes policy advices, as well as some possible extension study of this topic.