Theoretical Research on Monetary Flow Analysis - Basic Framework and Examination of Several Aspects

Author: Zeng Gang
Publisher:
Publish Date: 2006-05-01
Features: In July 2003, I took over the major project of the Chinese Academy of Social Sciences titled "China's Monetary Policy System: Problems and Adjustment Paths." At that time, China's economy had just emerged from the shadow of deflation brought by the Asian financial crisis, and price increases had started to show signs in some areas. Facing the turning point in the national economic operation, the macroeconomic policy, which had been expansionary in nature for five years, began to shift from the stage of to the direction of tightening. With the "outgoing" of the "Active Fiscal Policy," monetary policy received increasing attention. People hoped that the monetary policy, which had shown weakness in addressing the deflationary situation, could play a leading role in solving inflation problems. Naturally, people also hoped that the defects of China's monetary policy system, including its objectives, methods, tools, and transmission mechanisms, which had been exposed in a series of operations since 1998, could be seriously analyzed, so as to find some effective reform strategies. This project was established against this background. According to the plan, the final outcome of the project is a monograph that focuses on the objectives, tools, transmission mechanisms, and policy effects of China's monetary policy. As the research deepened, the project team unanimously agreed that: conducting research on monetary policy solely around monetary policy itself may not easily produce insightful results. This is because the requirements of real economic operation and the characteristics of the financial structure largely determine the choice of monetary policy objectives, transmission mechanisms, and the effectiveness of monetary policy. "Theoretical Research on Monetary Flow Analysis" discusses the relationship between monetary flow and monetary stock, as well as the issues of monetary policy operations based on monetary flow analysis. This is a fundamental theoretical issue. This is because, in monetary economics, the distinction between monetary stock and flow analysis has long existed and constitutes a fundamental category in monetary economics. Although since the publication of Keynes's "General Theory of Employment, Interest and Money," the monetary stock analysis method has become the mainstream research method in monetary economics, this mainstream method has always exposed fatal flaws in handling some practical monetary policy issues, so the discussion on monetary flow analysis has never ceased. At the same time, this discussion is also a highly practical monetary policy operation issue. This is because whether to focus on stock or flow directly affects the success or failure of monetary policy. To a certain extent, since the end of 2002, China's monetary policy has relied heavily on regulating the money supply (stock) to regulate macroeconomic operation, with little construction, and was forced to resort to the old method of directly regulating the deviation of loan total volume (note) in 2004, precisely because we focused too much on stock issues and ignored flow issues. Therefore, discussing the theoretical and practical significance of monetary flow analysis will help improve the efficiency of China's monetary policy.