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 undertook 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 rises had begun to appear 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 contemplation towards contraction. 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, means, tools, and transmission mechanisms, which had been exposed in a series of operations since 1998, could be thoroughly analyzed to find some effective reform strategies. This project was established against this background. According to the plan, the final outcome of the project was a monograph focusing on the objectives, tools, transmission mechanisms, and policy effects of China's monetary policy. As the research deepened, the project team unanimously agreed that studying monetary policy in isolation might not yield 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 monetary policy operations based on monetary flow analysis. This is a fundamental theoretical issue. In monetary economics, the distinction between monetary stock and flow analysis has long existed and constitutes a basic category in the field. Although the monetary stock analysis method has become the mainstream research approach in monetary economics since the publication of Keynes's General Theory of Employment, Interest and Money, this mainstream method has always exposed fatal flaws in addressing 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 one focuses on stock or flow directly determines 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 control macroeconomic operation, with little construction, and was forced to resort to the old method of directly regulating the deviation of loan total (note) in 2004, precisely because we paid too much attention to stock issues and neglected flow issues. Therefore, exploring the theoretical and practical significance of monetary flow analysis will help improve the efficiency of China's monetary policy.