The People's Bank of China (Central Bank) and its Neutrality
of Money Supply
Author’s Details:
Allieu Badara Kabia
1,2,31
PhD. Research Fellow, School of Economics, Liaoning University PR China
2
Director, Liaoning University's Society of International Academic
Research(LUSIAR)
3
University Of Makeni, Sierra Leone West Africa
Nationality:
Sierra Leone, West Africa
Publisher:
China Daily-
http://blog.chinadaily.com.cn/blog-1363023-20043.html- 13-06-2014
The Neutrality of money is a very significant concept in executing the monetary policy by Bank
regulators(Central Bank) and also accepted as a vital and important idea in Classical economics and is
related to the classical dichotomy with the idea that; a change in the stock of money affects
only nominal variables rather than real variables in the economy such as prices, wages, and exchange
rates, with no effect on real(inflation-adjusted) variables, like employment, real consumption, the number of
jobs, the size of real GDP and the amount of real investment. It implies that the Central Bank of China
(People’s Bank of China) does not affect the real economy by printing money to increase the Money
supply. Instead, any increase in the supply of money by the Central Bank Of China would be offset by a
proportional rise in prices and wages. This assumption underlies some mainstream macroeconomic
China Bank Notes (RMB)
CHART SHOWING BANK OF CHINA MONEY SUPPLY TRENDS
The neoclassical believe that changes in the supply of money will in the long-run period leads to real output
to adjust to an equilibrating path (where real output might increase, but an increase dictated by original
relationship between consumption and investment) whilst in the short-run period, changes in the money
supply seem to affect real variables like GDP and employment levels, mainly because of price stickiness
that changes in the Money Supply by the Central Bank Of China in the short-run will affect the real
variables like the GDP and employment rate more especially in Urban Cities with high level of commercial
activities like Beijing, Shanghai, Guangzhou, Shenyang and Dalian to name but a few.
CHART SHOWING BANK OF CHINA MONEY SUPPLY(M1) TREND
For instance, looking at Fisher’s Equation of the quantity theory of money (MV=PT). It can be seen that;
M- indicates Money supply,
P-average price level and
T-volume of transactions of goods and services with the principle that;
(Amount of Money) x (Velocity of Circulation) = Total Spending.
M V = PT
So, meaning in the short-run any change of Money Supply made by the Central Bank of China will in the
leads to either an increase or decrease in the equilibrium GDP as a result of the changes that might taken
place in the equation of the quantity Theory of Money. Then it is worthy to note that the growth of a
Country’s GDP has a negative functional relationship with the Unemployment rate, that is an expansion in
the GDP will leads to a decline in the high rate of Unemployment and a contraction in the GDP will
MONEY SUPPLY TREND AND BANK LENDING
Many economists maintain that money neutrality is a good approximation for how the economy behaves
over long periods of time but that in the short run monetary-disequilibrium theory applies, such that the
nominal Money Supply would affect output. One argument is that prices and especially wages are
sticky(because of menu costs etc.), and cannot be adjusted immediately to an unexpected change in the
money supply. An alternative explanation for real economic effects of money supply changes is not that
THE BANK GOVERNOR, BANK OF CHINA
In conclusion, the bounded rationality approach suggests that small decline in the Money Supply in the
Chinese Banking System are not taken into account when individuals/households sell their houses or look
for work and that they will therefore spend longer searching for a completed contract than without the
monetary contraction. Furthermore, the floor on nominal wages changes imposed by most companies in
the Chinese economic space is observed to be zero, an arbitrary number by the theory of monetary
