Using the balance sheet framework for monetary analysis: The case of China

Abstract

Monetary analysis has been out of fashion lately. However recent economic and inflation dynamics call for renewed attention. Since 2021, broad money growth has been associated with high inflation and overheated production. Central banks and academia should pay more attention to monetary analysis to understand the economic dynamics and formulate better monetary policy. This article briefly reviews the monetary analysis practices of major central banks and then focuses on China as a case study. We set out the features of the balance sheet of depository corporations, and use it as a basic framework for monetary analysis. There are seven money-supply channels of broad money, which fluctuate because of seasonality, demand conditions, regulation, and financial institutions micro-managing indicators. Any change of broad money will be reflected through the balance sheet. Applications include analysing long-term evolution of money supply channels, analysing and predicting monetary growth, recording major financial incidents, and so forth.