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How Does Financial Innovation Affect the Liquidity Trap Effect of China's Money Demand——Evidence from Financing Products

【Authors】
ZHAN Minghua,WANG Zetao,TANG Yanfei & XU Yueli
【WorkUnit】
Guangdong University of Foreign Studies,510006.
【Abstract】

This paper examines the impact of China's financial innovation represented by Internet financing products and bank financing products on the liquidity trap effect in recent years. Using the state space model of variable coefficient,we find that the liquidity trap is significant in China as a whole,but the significance is closely related to the monetary hierarchy as in that M1 and M2 are relatively significant,but M0 is not-Compared with developed countries,in China,financial innovation strengthens rather than weakens the liquidity trap effect of money demand,which may be related to insufficient variety of China's financial assets. However,the development of Internet financial assets has no significant impact on liquidity traps due to the “function order effect”. Although bank financial assets have significant impact on liquidity traps,they show “structure effects” for different levels of currencies. Additionally,the market-based reform of interest rates enhances the impact of financial innovation on the liquidity trap effect. The policy implication of the paper is that the quantitative unconventional monetary policy adopted during the European and American financial crisis must be fully considered by PBC,and the operation of monetary policy should be coupled with the change of China's financial structure.

 

JEL:E41,E52,D12


【KeyWords】
Liquidity Trap,Financing Products,Financial Innovation,The State Space Model of Variable Coefficient