The Impacts Of Financial Innovation On The Choice Of Intermediate Target Of Monetary Policy In China

Over the past ten years, especially in recent years, whether international or domestic, the rapid development of financial innovation has had a tremendous impact on every financial market, but the implementation of the central bank’s monetary policy conveys to the real economy mainly through the financial markets. The innovation of financial products, tools, and systems has a greater impact on the effectiveness of the agency’s objectives, thereby affecting the correlation between the intermediate target and ultimate goal and reducing the effect of monetary policy implementation. This paper studies the impact of financial innovation on monetary policy intermediary target selection has practical significance. This paper studies the impact of financial innovation on the intermediary target of monetary policy selection has a practical significance.This paper is based on the context of the rapid development of financial innovation, summarizes the theory of monetary policy intermediary target selection and the development China’s financial markets, and analyzes the impact of financial innovation on monetary policy intermediate target from the theoretical and empirical research view. The research ideas are as follows: Firstly, we should analyze of financial innovation motivation theory, money supply or rate as an intermediary target theory, and the three criteria of Intermediate targets selection and the different impacts of financial innovation on every selection criteria. Secondly, in this paper the current situation of financial innovation has been specifically described, the characteristics of its development process, as well as its lacks and challenges has been revealed, and the history of its evolution of China’s monetary policy intermediate target has been described briefly, and the present of financial innovation and the development of monetary policy intermediate target have been combined for the challenges of our country’s current intermediate target. Based on the above theoretical analysis, and from a statistical point, we use Granger causality, Johansen co-integration test, VAR model, impulse response analysis and variance decomposition to analyze the impact of financial innovation on intermediate variables, and we get a relevance between intermediate target and ultimate target as a conclusion, then we know that either money policy or interest rates has been affected by financial innovation. On the current situation of China’s economic development, the money policy may continue to use as an intermediate goal in the short term, but in the long term, the interest rate as intermediate goal has a greater advantage.On the basis of theoretical and empirical analysis, in the view of the lack of financial innovation and the impact on the selection of intermediate target, this paper puts forward the relevant policy recommendations: creating a favorable financial innovation environment, improving the interest rate system, speeding up the market interest rates, and improving our monetary statistics system in the short term.The main innovation of this paper is to demonstrate the innovative methods and the selection of variables. In this paper, we use the method of the combination between empirical models and successful experience of developed countries, and apply VAR model impulse response analysis and variance decomposition to analyze the financial innovation’s specific effects to intermediate target and the intermediate target and ultimate goal correlation. About the measures of financial innovation, many documents have chosen M2/M1, but in this paper, we use M2/M0 to measure the degree of financial innovation.