Financial Innovation And The Liquidity Trap Effect Of China's Money Demand

The liquidity trap effect of money demand has a great impact on the zerobound problem of monetary policy and the validity of monetary policy in a comparatively lower interest rate range.Starting from the economic logic of currency speculation demand,which is the optimal decision-making process of micro-economic entity asset portfolio,this paper examines the impact of China's financial innovation represented by Internet financing products and bank financing products on the liquidity trap effect in recent years under the premise of clarifying whether the liquidity demand liquidity trap effect exists,using the state space model of variable coefficient.We find that the liquidity trap is significant in China based on the fact that the mechanism of action is basically in reasonable agreement with the portfolio hypothesis,but the significance is closely related to the monetary hierarchy that M1 and M2 are relatively significant,while M0 is not significant.Compared with mature market economics,the difference is financial innovation of China strengthens rather than weakens the liquidity trap effect of money demand,which may be related to insufficient variety of China's financing products.However,the Internet financing product demand for currency speculation has no significant impact on liquidity traps due to the “functional main sequence effect”.Although bank financing products have significant impact on liquidity traps,they show “structural difference effects” for different levels of currencies.Additionally,the reform of interest rate marketization enhances the marginal impact of financial innovation on the liquidity trap effect,under the mechanism that China's marketization reform of interest rate weakens the segmentation of financial markets and strengthens the signal role of interest rates in the micro-economic entity's financial asset portfolio.The policy implication of the article is that the efficiency of low interest rate monetary policy is limited under the circumstance of current high financial risks and the difficulty of financial stability.The reference significance of the quantitative unconventional monetary policy adopted during the European and American financial crisis must be fully considered,and the operation of monetary policy should be coupled with the characteristics of China's financial structural changing stage.