The Analysis Of Monetary Factor Of Chinese Inflation

Starting from studying the monetary factor of inflation in China, and on the purpose to discuss the causal relation between money supply and inflation, this thesis specifically analyzes the relation between inflation and money supply during 2002.01 to 2008.04 and draws the conclusion that M1 Granger causes inflation during the period.Concerning the structure for this thesis, first of all, it iterates the core issues of inflation such as its definition, measurements, and main theoretical explanations as well as the common strategies to cope with inflation. Meanwhile, it also introduces the key concepts of money supply including base money, money multiplier and the different category of money together with money's exogenousness and endogenosness. Afterwards, the money supply and the situation of inflation during 2002.01-2008.04 are fully described with figures and graphs concerned. The details include base money, money multiplier, M0, M1 and M2 plus the inflation during the period as well as its characteristics. With the theoretical description and actual data above, the thesis applies the substantive method, specifically Johansen test and Granger causal test to find out the substantive relation between inflation rate and M0, M1 and M2 rates respectively. The conclusion is that there is no Granger causal relation between M0, M1 and inflation concerning its year on year growth rate, there is Granger causal relation between M1 and inflation for its year on year growth. The explanation for this conclusion is that M1 is most liquid asset and regarded as the quantity of current money, hence having the closest relation with price level. M0 as the cash in current, though very liquid, is only part of the currency in current in the modern developed payment system. M2, a concept of total money quantity, though has a long term relation with inflation, its liquidity is not very high and the effect toward prices is not so obvious during this period.Another point is that during Jan.2002 to Apr.208 there is only one way relation between M1 growth rate and inflation rate, which shows M1 growth rate is an exogenous factor to inflation. In the other hand, Money supply is indigenous factor toward economic growth. So such kind of features of being exogenous toward inflation and indigenous toward economic growth makes the money supply control very complicated, and the monetary policies to economic growth and money satiability is contradictory within itself.