A Study On The Relations Between Money Supply And Business Cycle In China

After the U.S. subprime mortgage crisis, many countries have issued a series of policy in order to eliminate the influence of the subprime crisis. The people's bank of China cut the deposit reserve four times and cut the interest rates five times since Sep.2008, at the same time it issued a series of loose monetary policy in order to achieve the goal of promoting economic growth. Under the above measures, in the year 2009 and 2010, Chinese GDP growth achieved respectively 8.7% and 10.1%, monetary policy played a significant role. How to use monetary policy to inverse cycle in order to respond to economic volatility is concerned topic of the central bank, therefore, this thesis attempts to analyze the relations between money supply and business cycle, draw the conclusion, in order to guide monetary policy to inverse the business cycle fluctuations.In 1996, the people's bank of China formally set money supply M1 as intermediary goal, M2 as observation target to regulate, without taking other economic variables into consideration, the thesis selected M2 as money supply index, GDP as business cycle index, using the data from 1996 to 2010, taking theory and empirical analysis. This thesis firstly uses the chart to describe t the relationship between the money supply and the business cycle and make preliminary judgment. Then the thesis uses VAR model, Granger test, impulse response and takes empirical research method to explore the impact of the money supply to the economic cycle and time lag.Through theoretical and empirical analysis the thesis obtains the following conclusion:the money supply has influences on business cycle, the time lag is about half a year. Based on this, the thesis puts forward the relevant policy suggestions: improve the control of the money supply, explicit the time point to adjust the money supply and turn monetary policy from the quantity control to optimize the structure, etc.