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Financial Product Innovations’ Effect on Monetary Policy’s Effectiveness in China

Author: WeiZuo
Tutor: LiShu
School: Southwest University of Political Science
Course: National Economics
Keywords: Financial Product Innovations Monetary Policy’s EffectivenessIntermediate goal Mechanism of conduction
CLC: F822.0
Type: Master's thesis
Year: 2012
Downloads: 126
Quote: 0
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Financial product innovations have been developed rapidly recent years,promoting the global economic development as well as bringing challenges on eacheconomies’ macroscopical adjusting control. For instance, these innovations havebeen weakening the effect of monetary policies. Financial innovations’ side effectsare blamed for the outbreak of the financial crisis in2008. Since the impacts fromthe crisis are still disturbing the global economic system,no more country isaddicting to financial innovations any longer. And the majority of the developingcountries are even strictly prohibiting the high leverage financial products.Obviously the inhibition of financial innovation has become the highlight of currentbanking supervision. In the case of China, what role domestic financial innovationsare playing in the successively soaring CPI, the growing expectation of inflation andthe effect of the monetary policies to curb inflation is worth considering. In short theresearch of financial innovation and its effect on monetary policies has got a greatpractical significance.This paper is based on a large amount of literatures about financial innovationand as an aspect of it, financial product innovation is the focus of this paper. Thetheme of this paper lies in the influence of financial product innovations on theeffectiveness of the monetary policy.Monetary policy,as one of the most important tools of macroscopical adjustingcontrol, has an overall impact on a country’s economic development. Using theoperating tools,such as open market operations, deposit reserve system andrediscount,the central bank regulates the money supply to achieve the ultimate goalsof monetary policy,including economic growth, full employment, price stabilityand the balance of international payments. As a microcosmic activity,financialproduct innovations have an essential impact on the money supply and demand,aswell as on the intermediate target and the tools of monetary policy. As a result, thismicrocosmic activity will affect the transmission mechanism of monetary policy andthe implementation of these ultimate goals and then affect the macro-economy as a whole. Thus the theoretical significance of this research lies in the establishment ofthe relationship of the macrocosmic concept of monetary policy and the microcosmicconcept of financial product innovation. Moreover the application of empiricalmethods to test this relationship will contribute to the reliability of the conclusion.This paper makes a summary of the present situation of the financial productinnovation and the monetary policy implementation in China. And then does thetheoretical research about the influence from financial product innovation onmonetary policy as to reveal the impact of financial product innovation on the moneysupply and demand,as well as on the intermediate target and the tools of monetarypolicy. And on this basis select several appropriate indexes to construct a model foran empirical research, of which the sample data are from China. The conclusionspresented by the empirical test will be explained under the background of China ’seconomic development,in order to provide some specific policy suggestions.The purpose of this paper is to point out the role of the financial productinnovation on China’s monetary policy implementation,to test the applicability ofthe correlative theories in the explaination of China’s economic development andthen to put forward specific policy recommendations and to draw on the advantagesand avoid disadvantages of financial innovations.At present financial innovation in China is still on the initial stage. As a result,the number of literatures on the effect of China’s financial product innovation on themonetary policy is quite small and the relevant empirical study is even less. That thepaper focuses on the financial product innovation and its effect on the effectivenessof China’s monetary policy makes it somewhat initiative. The research may not onlydeepen the understanding of the effect of financial product innovation on theeffectiveness of monetary policy in developing countries during the process ofeconomic transition, but also be helpful of making rational choices betweenencouraging the development of financial innovation and returning to the traditionalfinancial system for an immature financial market.So the research has a certainpractical significance.

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CLC: > Economic > Fiscal, monetary > Currency > China's currency > Principle of policy and its elaborate
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