货币银行学——邱玉钰

COURSE TITLE: The Economics of Money, Banking, andFinancial MarketsGRADE: International Economics and Trade 0801 STUDENT NUMBER: 1081020115NAME: Qiu YuyuAn Analysis on the Effectiveness of the Monetary Policyof China and Inflation1.IntroductionDuring the time from 2009 to 2010,a serious inflation occured in China. The reason is various while the main one is due to China's active intervention in the economy. Central bank has implemented a loose monetary policy since 2008 in order to deal with financial crisis. Inflation expectations is an considerable react to this "loose" monetary policy.2.Theory and ModelTheory and model used in this article include: 1) opening market operations by Federal Reserve on the impact of the monetary base is more accurate than that operation on reserve. 2) transmission of monetary policy model. 3) The modern theory of the quantity of money.3.Analysis3.1 Quantitative Easing Monetary Policy in ChinaIn the first half of 2009,the public and economists criticized the quantitative easing monetary policy of United States as a excessive one. Table 1 contains money supply M2 and its growth of China and United States.Table 1Comparison of U.S and China money supply growthyear China (billion RMB) USA (billion dollars)M2 Growthrates M1 GrowthratesM2 GrowthratesM1 Growthrates2006 345604 15.7 126035 17.5 70323 5.12 13665 -0.58 2007 403442 16.7 152560 21.0 74306 5.66 13661 -0.03 2008 475167 17.8 166217 9.0 81239 9.33 15954 16.79 Mar,2009 530627 11.7 176541 6.2 83166 2.37 15960 0.04June,2009 568916 7.2 193138 9.4 83700 0.64 16500 3.38 July,2009 573103 0.74 195889 1.42 83484 -0.26 16547 0.29 Aug,2009 576699 0.64 200395 2.30 82979 -0.60 16497 -0.50 Notes: All statistics come from China Statistical Yearbook 2008,International Monetary Fund: International Financial Statistics, U.S. Federal Reserve Bank Site (/) and People's Bank of China site ().In the year of 2009,there is a big difference in money supply growth between China and U.S. M2 of China in June exceeds the one in March by 7.2% while M1 exceeds by 9.4%. In the mean time, M2 and M1 in America grows by respectively 0.64% and 3.38%. The chain growth of M2 in China in July and April is respectively 0.74% and 0.64%. However, those in U.S. falls to 0.26% and 0.60%.The figures have clearly show that China's monetary policy is more excessive than that of USA. Federal Reserve increase mobility in financial market by purchasing long-term bonds. We have learned the theory that opening market operations by Federal Reserve on the impact of the monetary base is more accurate than that operation on reserve. So the results are effective in decreasing long-term bond yields and increasing credit confidence. In the contrary, People's Bank of China decreased deposit and lending rates for five times to improve the capacity in supply of credit funds of financial institutions——indirectly control money supply.From January to June 2009, M2 growth rate of 28.5 percent is well above the 17% target (December 2008, the Central Economic Work Conference determine the economic objectives are: 2009, GDP growth forecast is 8%, inflation is expected to 4%, M2 growth rate is scheduled for 17%). From this we can realise that the government monetary policy is a little inflation bias. From the first half of 2009, the collected money supply within the system has exceeded the demands of the real economy. So we should transfer our monetary policy to a stable one.3.2 Monetary Base and Money MultiplierAs we know, M=m (money multiplier)×MB (money base). There are two graphes about the diverse of money base and money multiplier in China and the United States followed.Graph 1The diverse of money multiplier in China and U.S.Notes:This chart is from the Guoyan Wang finishingAs can be seen by the chart，China's base money multiplier is higher and more fluctuated than that of U.S. As a consequence,when aiming to evaluate the effectiveness of monetary policy of the United states,Federal Reserve control money supply accurately through dealing with money base because of its relatively stable money multiplier during 2006 to 2008. Moreover,the significant seasonal fluctuations of money multiplier in China has led to a large deviations between target value and actual value occur. This can explain why our monetar y policy always don’t match the real economy. Generally speaking, money supply growth equals to expected production growth and price growth. The stimulation of economic activity is only possible in the short term,but it will be in the cost of inflation.3.3 Inflation tendencyPeople's bank of China has used the way of bank borrowing to increase liquidity. However, in fact, no lack of liquidity exists in financial markets at all. The rapid growth of money and credit leads to the effective transmission of monetary policy. This conclusion can be explained with the following model:M ↑ → BD ↑ → BL ↑→ I ↑→ Y ↑Transmission mechanism of monetary policy (BD represents bank deposits and BL represents bank loans ).On the one hand, the performance of the growth of fixed asset investment can easily be seen. On the other hand, financial markets have ample liquidity. Continual rising prices of inputs leads to the formation of a supply shock. When money supply and money demand is not balanced, price levels over time will be faster than the rise in the quantity of money——inflation.4 ConclusionsFrom the above analysis we can clearly get the following conclusions,China's loose monetary policy is the main reason of inflation. The Friedman modern theory of the quantity of money tell us that ,in order to stop the operation of the modern economy of inflation and achieve economic stability, the most fundamental measure is to control money supply growth rate, making it compatible with economic growth generally.So we should follow the quantity of money rules setting a stable monetary policy to maintain the stable economic growth.。