An Inquiry into the Money in the Capital Market--An Empirical Analysis of U.S. “New Broad Money”
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| Title | An Inquiry into the Money in the Capital Market--An Empirical Analysis of U.S. “New Broad Money”
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| Author | Shen Hanyao, Zheng Rongxin and He Wenjie |
| Organization | East China University of Science and Technology |
| Email | shenhanyao@126.com；bjll19902008@126.com；hewenjie1989@163.com |
| Key Words | New Broad Money; Missing Money; Capital Market; Money Creation; Price |
| Abstract | “Missing money”, which starts from 1970s, indicates that the positive relationship between the money supply (M1, M2) and inflation has disappeared. This paper argues that money is not “missing”, but is simply transferred from the banking system to the capital market, and in turn creates more money with the development of the capital market. That is, “missing money” is de facto “financial disintermediation”. The aggregate money should include not only the currency in circulation (M0), money in the banking system (Mb), but also money in the capital market (Mc). Accordingly the new broad money is defined as M3=M2+Mc. The empirical analysis of the size and structure of the new broad money in the United States shows that Mc outnumbers M2 in terms of both growth rate and volatility. Also, Granger-causality tests imply that M1 or M2 alone fails to explain the price movement. Mc must be incorporated with them to explain the price changes. The quantity theory of money is still valid with the new broad money. |
| Serial Number | WP513 |
| Time | 2013-10-15 |
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