The choice of intermediary target is an important content of monetary policy. In order to better achieve the ultimate goal of monetary policy, countries often choose different intermediate goals according to their national conditions and economic development stages. The following will analyze the intermediary target and its application in detail to illustrate the choice of intermediary target of China's monetary policy. I. Importance and Selection Criteria of Intermediate Targets of Monetary Policy (I. Importance of Monetary Policy Intermediate Targets, also known as intermediate variables of monetary policy, are indicators set by the central bank for observation and adjustment to achieve the ultimate goal of monetary policy, also known as intermediate targets. Its function is as follows: 1. Monetary authorities provide quantitative reference coefficients reflecting short-term economic changes and financial trends. The ultimate goal of monetary policy is the overall goal of macro-economy, which is complicated in space and lags behind in time. The establishment of the intermediate goal is precisely to make up for the deficiency of the final observation of this monetary policy. 2. Create conditions for macro-control. The intermediary target of monetary policy participates in the transmission process of monetary policy, which can make macro-control flexible and hierarchical, thus avoiding economic turmoil. 3. Provide a phased adjustment standard for monetary policy tools to keep consistent with the ultimate goal. It can be seen that the choice of intermediate target of monetary policy is directly related to whether the ultimate goal of monetary policy can be realized. (II) Selection criteria of intermediate targets of monetary policy Due to the above reasons, monetary authorities in various countries are very concerned about the formulation of intermediate targets of monetary policy. However, countries choose different intermediate targets according to their national conditions and the ultimate goal of monetary policy, but their criteria for choosing intermediate targets are basically the same, that is, they generally follow the "three characteristics" standard: 1. Relevance, that is, the intermediate goal must be highly correlated with the ultimate goal of monetary policy and have a functional relationship similar to that between independent variables and dependent variables; 2. Observability, that is, variables as intermediate targets must be able to measure the quantity accurately and quickly; 3. Controllability, that is, the specific variables of the intermediate target should be convenient for the monetary management authorities to use policy tools for effective control and regulation. Second, the intermediary target that can be chosen in theory and the practice in western countries (1) The monetary policy arrangement with exchange rate as the intermediary target has a long history, such as the form of linking the local currency with gold under the gold standard, and recent arrangements such as linking the local currency with a big country with low inflation or adopting crawling linkage. The advantages of monetary policy arrangement with exchange rate as the intermediary target are: 1. The price level of international trade goods is fixed, thus avoiding inflation; 2. The inflation expectation of the country can be linked to the inflation rate of the target country; 3. It provides automatic rules for the implementation of monetary policy and helps to alleviate the problem of time discontinuity. When the local currency tends to depreciate, a tight monetary policy is implemented; When the local currency has an appreciating currency, a loose monetary policy is implemented; 4. The intermediate target of exchange rate is simple and easy to be understood by the public. Britain and France have successfully pegged their currencies to the Deutsche Mark. When 1987 was pegged to the exchange rate, the inflation rate in France was 3%, 1992 dropped to 2%, and 1996 even fell below 2%. In Britain, the inflation rate of 1992 also dropped from 10% to 3%. However, there are also many problems in the monetary policy arrangement with the exchange rate as the intermediary target: 1. When the capital market is open, the fixed exchange rate makes the pegged countries lose the independence of monetary policy. Because of the transmission of interest rate, the economic fluctuation of the target country will be transmitted to the pegged country; 2. Foreign exchange market signal failure. Focusing on the fear of devaluation leads to excessive expansion, especially in emerging market countries, where central bank policies lack transparency and responsibility constraints, and there is no signal of excessive expansion policies; 3. The local currency is easily influenced by speculative funds. (2) Money supply Many big countries have no suitable target countries, so it is not convenient to implement the intermediate target arrangement of exchange rate, and the intermediate target is the money supply of banks. This arrangement has the following advantages: 1. The central bank adjusts monetary policy according to the domestic economic situation, sets appropriate inflation targets, and maintains the exchange rate without sacrificing domestic economic fluctuations; 2. The information of the central bank's policies is more transparent, and the money supply figures are published regularly with a short time lag. These policy signals fix the expectations of general accounts and help to curb inflation; 3. Measure the effect of the central bank's monetary policy in real time, and restrain the discontinuous behavior of decision makers. But all the above advantages depend on the stable relationship between monetary policy objectives and money supply. Once this connection changes, there will be a problem of time discontinuity, and the ultimate goal of monetary policy is difficult to achieve by controlling the money supply. Germany and Switzerland are typical countries that adopt this arrangement. (3) The policy of inflation rate was implemented in New Zealand/KOOC-0/990, Canada/KOOC-0/99/KOOC-0/,Britain/KOOC-0/992, Sweden and Finland/KOOC-0/993, Austria and Spain/KOOC-0/994. This arrangement includes the following contents: disclosing the medium-term inflation target; Taking price stability as the long-term primary task of monetary policy to ensure the realization of inflation target; The complete information strategy is no longer limited to pursuing a single intermediate goal, such as the growth of money supply; Improve the transparency of monetary policy by providing the public and the market with information about the plans and objectives of monetary policy makers; Improve the responsibility constraint of the central bank to achieve inflation targets. The advantages of this arrangement are as follows: 1. Compared with the exchange rate target arrangement, it is similar to the money supply target, which enables monetary policy to cope with domestic economic fluctuations and has advantages compared with the money supply target. The central bank can use all kinds of information instead of a variable to determine the optimal monetary policy; 2. Easy to be understood by the public with high transparency; 3. Strengthen the responsibility constraint of the central bank, so as to reduce the possibility of time discontinuity caused by the excessive expansion policy of the central bank to expand output and employment. The performance of the inflation rate target arrangement is quite good, and the countries that adopt this arrangement have reduced the inflation rate and inflation expectation at the same time. Moreover, once the inflation rate drops, it is not easy to rebound with the expansion of the economic cycle. However, this arrangement is also problematic: 1. Compared with the target arrangement of exchange rate and money supply, it is not easy to be controlled by the monetary authorities; 2. Because of the time lag of monetary policy, there is also a high time lag in the effect of controlling inflation, so the target arrangement of inflation rate can not provide the public and the market with real-time signals of monetary policy situation; 3. The impact of inflation rate target arrangement on the real economy is still unclear. (4) The intermediate goal is unclear. The current real monetary policy arrangement in the United States has no clear intermediate goal. The Federal Reserve shows great concern about long-term inflation control, and at the same time, it takes forward-looking actions when monitoring future inflation signals, and regularly implements preemptive monetary policy to curb the threat of inflation. Although the monetary policy arrangement in the United States is successful, there are still some defects, which may lead to the failure of future monetary policy. First, there is a lack of transparency. Speculation about the Fed's movements has led to unnecessary fluctuations in financial markets, and has led to uncertainty among manufacturers and the public about the future inflation rate and output expectations. In addition, the opacity of decision-making makes it difficult for the Fed to be accountable to Congress and the public because of the lack of standards to evaluate its performance. Moreover, the central bank is prone to the problem of time discontinuity, and may sacrifice long-term goals for the realization of short-term goals. Second, there is no clear intermediate target. The lack of intermediate target makes inflation expectations easier to Gao Qi when there is supply fluctuation, and it is difficult to maintain the medium-term effect of monetary policy. Third, over-reliance on the preferences, skills and personal credibility of central bank leaders. The above three shortcomings will eventually make the United States give up this intermediate goal of monetary policy. Iii. Intermediate goal of China's current monetary policy and reasons for its choice (I) Intermediate goal of China's monetary policy 1993 1993 At the end of 1993, the financial reform plan formulated by the People's Bank of China clearly stated that China's monetary policy would take money supply as the intermediate goal. But in fact, it was not until 1994 that China really regarded the money supply as the intermediate goal of China's monetary policy. Before 1994, the loan scale was an important intermediate goal of China's monetary policy. As the intermediate target of China's monetary policy, the money supply mainly includes M 1 and M2, where M 1 refers to the sum of cash in circulation and demand deposits that can be used for transfer payment, is a medium in transactions such as commodities, services and securities, and is also a means to pay wages, rents and interest. It is the most liquid financial asset in the hands of the public, and M2 is M 1 and quasi-currency. Strictly speaking, M 1 is the amount of money in circulation, not the total amount of money, and M2 is the total amount of money. At present, there are four main control tools used in China: 1. Credit plan. It mainly consists of three parts: deposit plan, loan plan and cash distribution or withdrawal plan, the most important of which is the loan plan with mandatory indicators issued to financial institutions. The central bank controls the money supply by controlling the loan scale of financial institutions. At present, the credit plan is still the Bank of China. The main means of macro-control; 2. Deposit reserve system. The establishment of the deposit reserve system enables the central bank to adjust the deposit reserve ratio according to economic development, thus affecting the credit creation of financial institutions; 3. rediscount system. Financial institutions can apply to the People's Bank for rediscount when funds are insufficient, and the change of rediscount interest rate will also affect the money supply; 4. Interest rate policy. In China, there are two ways for the central bank to adjust interest rates: first, the central bank directly intervenes to determine the loan interest rate of financial institutions; Second, the central bank stipulates the range and scope of interest rate fluctuations, and then influences the market interest rate through the loan interest rates of various financial institutions to adjust supply and demand. (II) Reasons for China's Choice of Money Supply as Intermediate Target In recent years, the central banks of Britain, Finland, Sweden, New Zealand, Canada and other western countries, under the pressure of financial liberalization, financial innovation and a large number of international foreign exchange transactions, have weakened the connection between their money supply and their economic activities, so that they have lost confidence in the intermediate target of monetary policy and have to gradually give up the intermediate target and turn to the ultimate target such as inflation index or total demand level, which has achieved good results. The advantage of inflation target lies not only in its excellent measurability and correlation, which is convenient for the public to understand and form stable and reasonable expectations and improve the effectiveness of monetary policy, but also in the fact that monetary authorities can retain the flexibility of using tools, so as to achieve the ultimate monetary policy goal of economic growth more effectively. Other countries still rely on intermediate targets, and their financial variables are mainly selected from the following five items: (1) interest rate; (2) exchange rate; (3) Return on net assets; (4) Money supply; (5) Domestic credit increased. Our government still insists on taking the money supply as the intermediary goal. Different from the above countries, China's money supply is still closely related to its economic activities. For China, (1) China's financial industry is promoting standardization, and all kinds of management and supervision are constantly strengthened, rather than promoting liberalization, and financial innovation is restricted and restricted; (3) The money market and the capital market have just started, and there are few financial instruments that can replace money; (4) RMB is not a convertible currency, so it will not become an important object of foreign exchange transactions. In China, due to the standardization of the financial industry and its restrictions on financial innovation, there are few financial substitutes for money, and RMB will not become an important object of foreign exchange transactions for a long time. Therefore, it is expected that the monetary policy with money supply as the intermediate target will remain unchanged for a long time to come. Fourth, the premise of the effectiveness of the money supply target is its stable correlation with the ultimate goal, namely inflation. In China, due to the standardization of the financial industry and its restrictions on financial innovation, there are few alternative tools for monetary finance, and RMB will not become an important object of foreign exchange transactions for a long time. Therefore, it is expected that the monetary policy with money supply as the intermediate target will remain unchanged for a long time to come. However, economic development is dynamic, and the above conditions will eventually be broken one by one. In order to guard against financial risks and improve the effectiveness of monetary policy, China must be ready to adjust the content of intermediate targets at any time. The practice of western countries provides us with good experiences and lessons.