The “Overissuance of Currency” Statement Lacks Scientific Evidence*

Wang Guogang
Institute of Finance and Banking, Chinese Academy of Social Sciences, Beijing

 
Abstract: The “ overissuance of currency” statement has been prevalent in China’s economics and finance sector for many years, but it is an unscientific argument. Its theoretical basis is that GDP corresponds to currency issued by the central bank but overlooks the fact that what money in circulation really corresponds to is the aggregate price of traded goods (including commodities, labor and financial products). It also overlooks how fast money is circulated and the production and operation costs incorporated in commodities. Practically, this statement ignores the fact that the remainder of M2-M0 in China is made up of various deposits whose direct function is substantially different from that of currency. The underlying reason for China’s huge sum of various deposits in M2 is that the proportion of consumption in GDP is decreasing and the investment rate is lower than the savings rate. It is natural for the M2 money supply to outnumber GDP in China. In essence, China’s CPI growth is the result of price spikes rather than inflation. Accordingly, the major solution should be a combination of financialpolicies and administrative measures rather than monetary policies.
Key words: overissuance of currency, scientific evidence, money supply

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