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The Empirical Analysis between Monetary Mechanism Variety and Macro-economy Change

Author: ZhangJie
Tutor: FanLiFu
School: Dongbei University of Finance
Course: Finance
Keywords: VAR model Monetary structure Cointegration relationship
CLC: F124;F224
Type: Master's thesis
Year: 2011
Downloads: 118
Quote: 0
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Abstract


The economic data of the third quarter of 2009, released by National Bureau of Statistics of China on October 22, shows that the CPI index drops by 1.1 percent. Of this, the CPI in September declines 0.8 percent comparing with the same period of last year. The statistics of CPI reveal that our national price level has been constantly in negative growth. The trend of inflation has not appeared yet and the macroeconomics is even in a deflation. Combining the financial statistics of the same period, it is found that M1 increases by 29.51% while M2 increases by 29.31%.The growth of Ml exceeds that of M2 which means the scissors gap between M1 and M2 reverse to a positive side, reaching to 0.2%. There exists a relationship between monetary structure and macroeconomic variables and this article tries to find out this relationship.Currently, the domestic academic community mainly focus on the relationship between the money supply and macoeconomic variables and the related research results are extremely abundant. However, attention paid on moentary structure is insufficient and some related research is ignored. This paper studies relationship between monetary structure and macoeconomic variables as a supplement to the money supply in order to improve the analysis of interaction between them.Traditional theory views that the money supply has an obvious affect on macoeconomic targets such as economic growth, price stability, employment increase and the balance of international payments. As a result, macroeconomic conditions are usually judged by the changes of the money supply. But both in traditional monetary policy theory and its practice, the impact of monetary structure has been neglected. As a matter of fact, the central bank could not control the economic development by simply monitoring the money supply because the mismatch of monetary structure often reflects on the surplus of the supply. By studying the changes of monetary structure and defining the channels of money transmission, this article is committed to provide additional intermediate targets for the central bank’s monetary policy and to guide the microeconomic entity to take appropriate consuming and investing strategies.Main Contents:IntroductionThis section includes the theoretical background of this topic, the practical significance of the research, the summarization of professional documents, the research methods and the innovation of this article. (2)The functions of money and its structure divisionThis part mainly defines money and divides it into different levels according to different liquidity.The long-term movements in monetary structureIn this part, the movements of different money levels are studied through data analysis.The reasons for fluctuations of monetary structure Through the establishment of a VAR model which includes various economic data and monetary structure index, this section analyses the reasons for monetary structure fluctuations.Analysis on the interaction between monetary structure and macroeconomic variablesIn this part, the article mainly inspects the advance or lag relationship between monetary structure and macroeconomic variables. Moreover, the influence which monetary have on GDP and CPI etc has been examined strictly. (6)Conclusions and recommendationsResearch Methods: In this paper, various methods are used including a combination of logical analysis and historical analysis, an integration of theoretical analysis and econometrics analysis and a consolidation of normative analysis and logical analysis. The logical ananlysis and historical analysis are used to research monetary structure and macroeconomic variables including the interactions between long-term(short-term) structural changes and economic fluctuations. The theoretical analysis and econometrics analysis are used in the empirical research on monetary structure and macroeconomic variables. By establishing a VAR model, the empirical part tests and vertifies the relationship between them.The theoretical analysis and econometrics analysis are also applied to point out the factors contributing to the interactions between monetary structure and macroeconomic variables.The normative analysis and logical analysis are used to make recommendations for the central bank to improve montary policy considering monetary structural changes.This article uses the VAR model to analyse the relationship between monetary structure and macroeconomic variables hoping to find out the accurate connection between them.This article summarizes and supplements the related theories especially the theory how monetary policy was transmitted through monetary structure. Besides, this paper concludes the factors causing the short-term fluctucations of monetary structure.Conclusion:The factors causing the changes include stock prices, the industrial added value, the index of market expectations and the real interest rate. There exists a stable cointegration relationship between monetary structure and other 4 factors. Duing a short term, these 4 factors have positive influence on the structure which means an increase of M1 in the proportion of M2 and an improvement of currency activation. In the long run, the index of market expectations and the industrial added value have negative impact on the currency activation while the stock prices and real interest rate have positive impact.A conclusion which can be drawn from the article is that there exists a significant interaction between monetary structure and macroeconomic variables.The variation of CPI can be reflected by indicators of monetary structure by 6 months in advance. GDP, fixed assets investment and the industrial added value can be good indicators and predictions for fluctuations of monetary structure. On one hand, changes in the level of economic activity can cause the fluctuations of monetary structure, on the other hand,the fluctuations of monetary structure lead to the variation of price index.

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