Empirical analysis on China money multiplier

Transcription

1 Aug. 2009, Volume 8, No.8 (Serial No.74) Chinese Business Review, ISSN , USA Empirical analysis on China money muliplier SHANG Hua-juan (Financial School, Shanghai Universiy of Finance and Economics, Shanghai , China) Absrac: The paper firsly represens wo ind saemens of China money mulipliers and heoreically analyzes he relaionship beween each srucure facor and China money muliplier. Secondly, i summarizes he several feaures and he move rends of China narrow and broad money mulipliers and heir srucure facors. Thirdly, he paper empirically analyzes how and wha degree he each srucure facor affecs China narrow and broad money mulipliers holding everyhing else consan. A las wo imporan conclusions are go, ha is, he required reserve raio is he mos associaed wih China money mulipliers and he saving deposi raio is more associaed wih ha, he required reserve raio and he ineres raes can be used as he ways of affecing money aggregae by he People s Ban of China. Key words: empirical analysis; China money muliplier; narrow money muliplier; broad money muliplier; srucure facors of China money muliplier The money muliplier reflecs he muliple relaionships beween he money supply and he moneary base. The sabiliy of money muliplier is one of he ey problems for he conrol of he moneary aggregae and he People s Ban of China has used he ool of adjusing and conrolling money supply. So we mus pay aenion o researching on China money muliplier. 1. China money muliplier and is srucure facors 1.1 The saemens of China money muliplier There are wo saemens of China money muliplier because of he similariy and he deference beween he money policy of China and he one of oher counries. Firsly, he money muliplier can be wrien as mm/b from he model of he money supply (MmB). So China money muliplier can be wrien as m 1 M 1 /B and m 2 M 2 /B. C + D C + D + T + S + O Secondly, China money muliplier can be wrien as m1 and m2 from he componens R + C R + C of he money supply and he moneary base, because China money aggregae can be divided ino hree iers, ha is, he firs ier is he currency in circulaion (M 0 ), he second ier is he narrow money (M 1 ) currency in circulaion (C) + demand deposis (D), he hird ier is he broad money (M 2 ) narrow money + ime deposis (T) + saving deposis (S) + oher deposis (O). R If represens he cash raio or loan cash raio (C/D), r represens he required reserve raio ( ) 1, e represens he excess reserve raio ( E D + T + S + O D + T + S + O ), represens he ime deposis raio (T/D), s represens he saving SHANG Hua-juan, Maser, associae professor, Financial School, Shanghai Universiy of Finance and Economics; research fields: cenral ban and moneary policy. 1 The People s Ban of China implemens he same required reserve raios o all inds of deposis, such as he demand deposis, he ime deposis, he saving deposis and he oher deposis. 43

2 Empirical analysis on China money muliplier deposis raio (S/D), o represens he oher deposis raio (O/D), China narrow money muliplier is: D C + D D m1 C D T S O + ( r + e)(1 + + s + o) (1) + ( r + e)( ) D D D D D China broad moneary muliplier is: D C T S O D D D D D + + s + o m2 C D T S O + ( r + e)(1 + + s + o) (2) + ( r + e)( ) D D D D D 1.2 The srucure facors of China money mulipliers The srucure of China money muliplier include six facors, ha is, he cash raio (), he required reserve raio (r), he excess reserve raio (e), he ime deposi raio (), he saving deposi raio (s) and he oher deposi raio (o). The auhor respecively analyzes he relaionship beween each facor and he money muliplier from he heory in he following The cash raio () Holding everyhing else consan, he cash raio is negaively relaed o China narrow and broad money mulipliers because loan, which is cashed, would decrease he demand deposis and he capaciy of ban credi expansion. The greaer he cash raio () is, he more loans will be cashed and he smaller China narrow and broad money muliplier is The required reserve raio (r) Holding everyhing else consan, he required reserve raio negaively relaed o he narrow and broad money mulipliers because he rising of he required reserve raio means ha he People s Ban of China will absorb more liquidiy of he commercial bans and he financial insiuions The excess reserve raio (e) Holding everyhing else consan, he excess reserve raio also is negaively relaed o he narrow and broad money mulipliers. If he commercial bans and he financial insiuions hold more excess reserves, heir liquidiy will be decreased as he same as he rise of he required reserve raio The ime deposi raio () Holding everyhing else consan, he ime deposi raio is negaively relaed o China narrow moneary muliplier, bu i is posiively relaed o China broad money muliplier. The firs reason for ha is he ime deposis implemen he same required reserve raios as he demand deposis in China. When he ime deposis increase he commercial bans and he financial insiuions mus eep more reserve deposis wih he People s Ban of China. So heir capaciy of credi expansion would be decreased in he condiion of China narrow money muliplier. The second reason is ha he amoun of he ime deposis rising is greaer han ha of he ime deposi reserves in he condiion of China broad money muliplier. The rising of he ime deposis would raise he commercial bans and he financial insiuions capaciy of credi expansion The saving deposi raio (s) and he oher deposi raio (o) Holding everyhing else consan, he saving deposi raio and he oher deposi raio are all negaively relaed o China narrow money muliplier, bu hey are posiively relaed o China broad money muliplier. The reasons for ha are he same as he ime deposi raio. 44

3 Empirical analysis on China money muliplier 2. The move rends of China money mulipliers and heir srucure facors 2.1 The move rends of China money mulipliers The auhor changes he equaion M 1 m 1 B 1 and M 2 m 2 B 2 ino he logarihm logm 1 logm 1 +logb 1 and logm 2 logm 2 +logb 2 o calculae China narrow and broad money mulipliers (m 1 and m 2 ) of 2000 o he firs quarer of Then he drew he figure of he move rends of China narrow and broad money mulipliers from 2000 o he firs quarer of 2009 (Fig. 1). Finally he discovered ha China narrow and broad money mulipliers from 2000 o he firs quarer of 2009 had several obvious feaures, hey were: (1) China narrow money muliplier (m 1 ) is more sable, i has a decreased rend form he fourh quarer of The highes poin of he narrow money muliplier (m 1 ) is he hird quarer of 2003 (ha is ) in he all erm. Afer his poin i has decreased and been furher sable. The fourh quarer of 2008 is he lowes poin (ha is ) in his ime period. The spread beween he highes poin and he lowes one is (2) China broad money muliplier (m 2 ) is also more sable in he ime period and i has a decreased rend form he fourh quarer of 2006 as he same as he narrow money muliplier (m 1 ). The highes poin, which is , is he hird quarer of 2003; he lowes one, which is , is he fourh quarer of 2008 in his ime period. The spread beween he highes poin and he lowes one is (3) From above analysis, we can see he highes and lowes erms of China broad money muliplier (he hird quarer of 2003 and he fourh quarer of 2008) are he same as ha of China narrow money muliplier. Therefore, hey nearly have he same move rend, bu China broad money muliplier is more sable han he narrow money muliplier and all money mulipliers have decreased rends for recen years. (4) The average muliple value of he raio of China broad money muliplier o he narrow money muliplier is 2.89, bu he raio had been increased from The smalles raio is he hird quarer of 2003 in his period, ha is 2.25 imes, bu he greaes one is he fourh quarer of 2008, ha is 4.51 imes. So he spread beween China broad money muliplier and he narrow money muliplier is expanding for recen years, especially from 2007 o he firs quarer of logm1 Logm 1 Logm logm Mar-00 Sep-00 Mar-01 Sep-01 Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Fig. 1 Move rends of China m 1 and m 2 from 2000 o he firs quarer of

4 Empirical analysis on China money muliplier 2.2 The move rend of he srucure facors of China money mulipliers Using he daum, which he People s Ban of China had published, he auhor drew he figure of he srucure facor move rends of China narrow and broad money mulipliers from 2000 o he quarer of 2009 (Fig. 2), and discovered ha he srucure facors of China narrow and broad money mulipliers have several obvious feaures, which are shown as follows: (1) The required reserve raio was coninually raised from he fourh quarer of A he second quarer of 2008 (June 25, 2008), i had been raised from 6% o 17.5%. Is rising may resul in China money mulipliers decrease. (2) There is a decreasing rend in he excess reserve raio. For example, in his period he highes poin of he excess reserve raio is 6.88% (he fourh quarer of 2004) and he lowes one is 1.02% (he firs quarer of 2009), and heir spread is 17.79%. The average value of he excess reserve raio of 2007, which is 3.27% and ha of 2008, which is 2.78%, are less han ha of all he period, which is 4.68%. The excess reserve raio afer he second quarer of 2008 is he lowes sage of ha in all he ime period. The reason for ha is he People s Ban of China had published he required reserve raio increase several imes from 9% o 17.5% during he period from 2007 o 2008; The financial insiuions mus mee heir required reserves by reducing heir excess reserves. The decreasing of he excess reserve raio may resul in China money mulipliers increase. (3) There is a slow-decreased rend in he cash raio. The highes poin is he firs quarer of 2000, ha is 46.52% and he lowes one is in he fourh quarer of 2007, which is 24.51%. The reason for is decreasing is ha more and more people has used elecronic money (such as ban cards, credi cards and newor ban, and so on) o purchase goods or pay service fee. The decreasing of he cash raio would resul in China money mulipliers rising. (4) There is an increased rend in he ime deposi raio. The lowes level of he ime deposi raio is he firs quarer of 2002 (29.93%). Afer ha ime i has increased coninually. The highes level is he hird quarer of 2008, which is 64.75%. All he year of 2008 is he fases period in he growh speed of he ime deposi raio from 2000 o he firs quarer of The four quarers ime deposi raio of 2008 respecively is 57.38%, 61.61%, 64.75% and 63.43%. They are so high. The reason for ha is he People s Ban of China had raised he ineres raes of he deposis again and again from Ocober 29, 2004 for conrolling he high inflaion rae. The resul is he amoun of he ime deposis fas increasing because of he deposiors for geing more reurns. The increased rend in he ime deposi raio will resul in China narrow money muliplier decreasing and he broad money muliplier increasing. (5) The curve of he saving deposi raio shows ha here is a grea flucuaion in he saving deposi raio. The highes level of he saving deposi raio is he firs quarer of 2006, ha is 1.875, bu he lowes poin is he fourh quarer of 2007, ha is The moving level of he saving deposi raio in he ime period is 46.76%. The saving deposi raio began o decrease from he fourh quarer of 2006 and hen i began o increase from he second quarer of 2008 because of he price of China soc mares fas rising during his ime period and a large amoun of he saving deposis flowing ino he soc mares. Alhough he People s Ban of China coninually had raised he ineres raes, he bans canno absorb more saving deposis. Conrary siuaion occurred during he second quarer of 2008 for he price descending of China soc mares. The decrease of he saving deposi raio will resul in China narrow money muliplier increasing and broad 46

5 Empirical analysis on China money muliplier money muliplier decreasing, and vice versa. (6) There is a grea flucuaion in he oher deposi raio. The highes level of he oher deposi raio is he firs quarer of 2002, which is 27.13%, and he lowes one is he firs quarer of 2006 (ha is 2.267%). The spread is 24.86%. The srucure of oher deposis includes he foreign money deposis and he rus deposis. Therefore, he change in he oher deposi raio would be affeced by flucuaions of he price of he soc mare, RMB exchange rae, ineres raes and oher facors. The reason for grea flucuaion in he oher deposi raio is ha here is a flucuaion of he price of he soc mare, RMB exchange rae, ineres raes, ec. The average value of 2007, which is 13%, and ha of 2008, which is 11.33%, is lower han ha of his ime period, which is 15.44%. The decrease of he oher deposi raio will resul in China narrow money muliplier increasing and he broad money muliplier decreasing, and vice versa. r e s o s Mar-00 o r e Sep-00 Mar-01 Sep-01 Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Fig. 2 Move rends of he srucure facors of China moneary mulipliers 3. The effec of each srucure facor on China money mulipliers Suppose oher facors unchanged, he following equaions can be used o calculae he effec of each srucure facor, such as he required reserve raio on China narrow and broad money mulipliers. r Δm1 + ( r + e )(1 + + s + o ) + ( r + e )(1 + + s + o ) (3) Δm r s + o + ( r + e )(1 + + s + o ) + ( r e )(1 + + s + o + s + o ) In he above equaions, r represens required reserve raio a ime, r -1 represens he required reserve raio a ime -1, ec. According o he rule we can respecively ge he equaions of he effec of he oher srucure facors, such as he excess reserve raio, he cash raio, he ime deposi raio, he saving deposi raio and he oher deposi raio on China money mulipliers (omied). The acual effecs of he srucure facors on China money mulipliers as following (all of figures omied). (4) 47

6 Empirical analysis on China money muliplier 3.1 The cash raio () Holding everyhing else consan, he cash raio is negaively relaed o China narrow and broad moneary mulipliers. The effec of he cash raio on China broad money muliplier is greaer han ha on China narrow money muliplier. The average effec of he cash raio on China narrow money muliplier is 1: , ha is, if he cash raio increases 1%, China narrow money muliplier will decrease %. The average effec of he cash raio on China broad money muliplier is 1:-0.254, ha is, if he cash raio increases 1%, China broad money muliplier will decrease 0.254%, holding oher facors consan. 3.2 The required reserve raio (r) Holding everyhing else consan, he required reserve raio is negaively relaed o China narrow and broad money mulipliers. The average effec of he required reserve raio on China broad money muliplier is slighly greaer han ha on China narrow money muliplier. The average effec of he required reserve raio on China narrow and broad money muliplier is respecively 1: and 1:-1.324, ha is, if he People s Ban of China raises 1 percen of required reserve raio, China narrow money muliplier will be reduced 0.473% and China broad money muliplier will be reduced 1.324%, holding oher facors consan. 3.3 The excess reserve raio (e) Holding everyhing else consan, he excess reserve raio is negaively associaed wih China narrow and broad money mulipliers. The average effec of he excess reserve raio on China broad money muliplier is also greaer han ha on China narrow money muliplier. The average effec of he excess reserve raio on China narrow and broad money muliplier is respecively 1: and 1:-4.213, ha is, if he commercial bans and financial insiuions increase 1% of heir excess reserve raio, China narrow and broad money muliplier will be reduced 1.507% and 4.213%, holding oher facors consan. 3.4 The ime deposi raio () Holding everyhing else consan, he ime deposi raio is negaively associaed wih China narrow money muliplier, bu i is posiively associaed wih China broad money muliplier. The average effec of he ime deposi raio on China narrow money muliplier is 1: , ha is, if he ime deposi raio rises 1%, China narrow money muliplier will decrease %. The average effec of he ime deposi raio on China broad money muliplier is 1: , ha is, if he ime deposi raio rises 1%, China broad money muliplier will also increase %, holding oher facors consan. 3.5 The saving deposi raio (s) The saving deposi raio is negaively relaed o China narrow money muliplier, bu i is posiively relaed o China broad money muliplier, holding he oher facors consan. The average effec of he saving deposi raio on China narrow money muliplier is 1: and ha on China broad money muliplier is 1: In oher words, if he saving deposi raio rises 1%, China narrow money muliplier will decrease % and China broad money muliplier will increase %, holding oher facors consan. 3.6 The oher deposi raio (o) The oher deposi raio is negaively relaed o China narrow money muliplier, bu i is posiively associaed wih China broad money muliplier, holding he oher facors consan. The average effec of he oher deposi raio on China narrow money muliplier is 1: and ha on China broad money muliplier is 1: In oher words, if he oher deposi raio rises 1%, China narrow money muliplier will decrease 0.046% and China broad money muliplier will increase 0.084%, holding oher facors consan. 48

7 Empirical analysis on China money muliplier 4. Conclusions Some following conclusions are go from he above empirical analysis on China narrow money muliplier, broad money muliplier, and heir srucure facors. 4.1 The required reserve and saving deposi raio associaed wih China money mulipliers The required reserve facor is he mos associaed wih China narrow and broad money muliplier of all facors using he daum from 2000 o he firs quarer of 2008 (cu ou several abnormal poins) o regress, under everyhing else consan. The saving deposi raio is more associaed wih China narrow and broad money mulipliers han oher facors, under everyhing else consan. Oher facors, e.g. he cash raio, he excess reserve raio, he ime and oher deposi raios, are respecively less associaed wih China narrow and broad money mulipliers under everyhing else consan. The resul old us ha he People s Ban of China can affec China money mulipliers and money aggregae hrough adjusing he required reserve raio and he saving deposi raio. If he People s Ban of China raises he required reserve raio, China narrow and broad money muliplier and he growh rae of money aggregae will be decreased. If he saving deposi raio increases, China narrow money muliplier will be decreased, bu China broad money muliplier will be increased, vice versa. 4.2 The People s Ban of China can use he ools of he required reserve raio and he ineres raes o affec he money mulipliers and money aggregae The mos valid way of he People s Ban of China affecing he money muliplier is increasing or decreasing he required reserve raio, bu he saving deposi raio also is a more valid mehod. The People s Ban of China can affec he money muliplier by leading people s saving flow direcion, for example, raising he ineres raes of he saving deposis o draw more saving deposis. I resuls in he growh rae of he narrow money aggregae decreasing and ha of he broad money aggregae increasing. So increasing or decreasing he ineres raes will be anoher srong mehod of adjusing he macro economy for he People s Ban of China, besides raising or reducing he required reserve raio. The People s Ban of China was aimed a liquidiy surplus of he economic sysem o raise he ineres raes and he required reserve raio several imes in he las several years. The above empirical analysis proves ha using he ools of he required reserve raio and he ineres raes is correc for conrolling liquidiy and he growh of he money aggregae. References: CHEN X.. (1998, January). Empirical analysis on he move rend and affecing facors of China recen moneary muliplier. Journal of Financial Research, Frederic S. Mishin. (2002). The economics of money, baning and financial mares. Addison-Wesley, The People s Ban of China. Rerieved from hp:// (Edied by Annie and Chris) 49