| This article addresses the effect of money supply on economic growth. In the past twenty years, much attention has been paid to the monetary policy, which reflects the nation-wide ultimate concern about the economic growth. While many articles on this area, there were, however, fewer about the effect of money supply on economic growth. And that is the initial motivation of my attention to address the issue.The first part of the article is theoretical analysis framework, which includes different theories on this issue. In the long-term analysis, which is called theory of economic growth, money is excluded outside the framework. Solow Model, a traditional and well-known foundation in the theory of economic growth, shows how saving, population growth, and technological progress affect the growth of output over time. Growth accounting measures and computes the contribution of factors in production, which offers an interpretation, rather than all facts, of the nature of growth, one that implies a picture of future prospects.In the short run, output growth is closely connected with the money supply. The reduced-form function, y=m-p, shows the basic effect of the money, while the aggregate expenditure function, Y=C+I+G+(X-M), shows the channels through which money supply affects output. Keynes explained the role of money in the determination and change of interest rate, which is the key factor in the determination of investment. Different from Keynes' policy of lower interest rate, Makinon and Shaw argued that higher real interest, in developing countries, would increase investment both in quantity and quality. Friedman viewed that expenditure financed by newly created money is cyclically stimulative, based both on the statistical research of the relation between money and output and on the evidence in Japan and United States in recent years.Since demand side movement could not explain the whole story of the effect of money, many economists turned to supply side to find why nominal money affects output. Keynes' explanation was that workers focused mostly on nominal wages, which was sticky. An increase in money leads to an increase in prices, a reduction in real wages and an increase in output. By the early 1970s there was a wide consensus as to the re-explanation of the "wage-price mechanism". Tobin summarized that the response to changes in input prices was quick, so that price reflected wage increased quickly and fully. An increase in the level of money leads to an increase in output, which returns to normal over time. Lucas constructed a macroeconomic model with optimizing agents, decentralized markets and imperfect information. No distinction is made between workers and firms. Since firms partly misperceive money shocks for relative price shocks, imperfect information leads to an effect of unanticipated money on output. Later on, Fischer and Taylor developed models which embodied nominal wage rigidities and rational expectation, and which implied a role for policy in general and for monetary policy in particular. Fischer model has two implications. The first is that the effects of money on output last for two periods. The second is that monetary policy based on information available at the beginning of the period can decrease output fluctuations. Taylor model gives an alternative interpretation of wage behavior and results are different: the effect of money lasts for much longer than the time during which each nominal wage is fixed.The second part turns to the analysis of the effect of money supply on economic growth in China, especially in the period from 1984, when the People's Bank of China was established as the central bank. We divide the period into three periods: 1984-1992, 1993-1996, and 1997-. In the first period, 1984-1992, output growth rate increased as money supply rose, output growth rate decreased when central bank decreased loans and the supply of money. The regulation action from 1993 finally led to the "soft landing" of the economy, with low inflation rate and high growth rate... |
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