An Empirical Study On The Impact Of Money Supply Shocks To Domestic Inflation

China has been facing increasing inflation rate since the later half year of 2010 with CPI soared to 5.1% in November and the overall CPI was 3.3%, which exceed the target inflation rate set by China's Central Bank. The relatively serious inflation had many side effects on social and economic activities. The 2010 inflation happened after the loose monetary policy. In 2009 and 2010, the central bank has already issued more than 17 trillion RMB loans through banking systems and this on one hand, provided positive environment for China's economies' recovery and on the other hand, pushed the asset price to a much higher level, causing serious inflation problems in late 2010.In the long run, the speed of China's money supply is much higher than the economic growth and there existed excess liquidity. The traditional opinion takes such ideal that this situation will stimulate the economic growth in the very short term, but it has no effect on output but only on the same rate of inflation rate in the very long run. This paper is based on such opinion and carried out research on the relationship between china's excess money supply and inflation problem. We hope that the conclusion of this paper will enable the central bank improve the skills and practice of managing domestic inflation problem and find new ways to tackle the inflation.We divided this paper into five parts. In chapter one, we introduced the background of our research, then we classified and summarized the existing research opinions and conclusions, on the basis of which, we built the structure and innovation of this paper. In chapter two, we summarized some important concepts and theories. In chapter three, we studied the main inflation cycles in the past twenty years and calculated the excess monetary growth rate. Chapter four is very significant in terms of that this chapter carried out empirical study of the relationship between excess money supply and the inflation rate in China. Chapter five was the conclusion of the main results of the empirical studies. We found that domestic inflation was driven both by the gap of money supply and gap of overall demand. Also, we noticed that central bank's response to the inflation was very fast. However, the effect of the policy changes was not very sufficient.