The important influence factor of currency —“intermediate products”

Keyword: 
Financial institutions
Topic: 
Financial Economics

Monetary demand indicators are mainly affected by the following factors: the final product GDP and interest rates, price changes and the structure of financial assets, firm and individual industrial structure, financial market transactions. However, the current study finds that there is still a large proportion of "excess" or "disappearance" of the currency has not been explained. Precipitated currencies with poor liquidity will have adversely affected the monetary policy of various countries in the world.

In order to better understand the demand for money, we must understand the money supply. As the mentation the gap between supply and demand is a theoretical puzzle. That is what I wanted to explore point. Let's take China as an example. China's money supply growth rate has exceeded the growth rate of money demand (real GDP growth rate+ CPI) [i] for a long period of time, as M2 / GDP continues to rise. The gap between supply and demand of money and its theoretical confusion will undoubtedly seriously affect the scientific nature of monetary policy.

Why is there such a phenomenon? Changes in demand for money reflect not only the changes in the final product transaction, but also the changes in the intermediate products transaction. Intermediate products consists of two parts: (a) physics products. It includes processed materials processing, manufacturing, wholesale trade and a series of transactions in the session, of which, consumables are farmers' products, commodities, durables have second-hand housing, used cars, resale land. The middle input in the IO table is part of the physical intermediate products. (b) financial intermediate products. It includes stocks, funds, bonds, warrants, of each secondary stock exchange et cetera. This means that studying the money supply, the general price level, and economic development issues need to take into account not only the rate of GDP growth, but more importantly, the growth rate of intermediate products. Intermediate products is an important indicator to measure the division of labor and specialization. It is an important part of the mechanism of the impact of changes in the demand for money.

From the equation of the quantity of money, we can see that the main determinant of the demand for money is the GDP of one economy, while the GDP is the sum of the final products. Accompany with the economic globalization, the market allocation of resources of multinational corporations. Studying whether the issue of money is overdue should consider not only the growth rate of GDP but also the growth rate of intermediate products. Taking into account only the transactions of the final product each year, without considering the resale transactions necessary to reach the final product, is not enough to explain the difference between the growth of the money supply and the growth of nominal GDP. At the same time, the study of the general price level should not only consider the growth rate of GDP, but also consider the growth rate of intermediate products. Ignoring the growth in the volume of intermediate products, it is easy to draw the wrong conclusion that the general price level is underestimated.

At present, the regulation and control of monetary policy in various countries generally takes the change of the actual "GDP + CPI" as an important indicator of the change in the demand for money so as to control the money supply and interest rates. However, the currency not only serves the transaction of final product GDP, but also serves the transaction of intermediate products. Neglecting the heavy occupation of currency by intermediate products trading is likely to result in the under-regulation of monetary policy.


i In China CPI is divided into urban residents price index and rural residents price index.

ii Comprehensive comparable CPI data, provided by the National Bureau of Statistics of China until 2015.

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