Existence Of Virtual Economic Conditions Under The Impact Of Money Supply On Inflation

Since the mid-1990s (especially since 1997), with the development of China's capital market and marketization, excess liquidity and the drastic fluctuation of assets prices have become the typical phenomena of Chinese economy, which are represented by the remarkable difference between the amount change of monetary supply and the variation of the main variables in the real economy (output and price). By simply using existing economic theories, these phenomena can not be well explained, and new analysis is needed to be established. Hence, this paper discusses the impact imposed by monetary supply behaviors and monetary supply changes on price level in considering the fictitious economy. In both theoretical and empirical aspects, the reason why the rate of monetary supply increase and the inflation rate are no longer consistent is analyzed and measures are provided for the practice of economic policies that are aimed at healthy and steady economic operation.Specifically, the paper is organized as follows. First of all, traditional theories of monetary economics are reviewed and the phenomena having happened in China since the year 1997 are analyzed. Through this process, it is clear that these phenomena can not be well explained with the use of existing economic theories, and new analysis is needed to be established. Secondly, the impact imposed by monetary supply on inflation in fictitious economy is analyzed in a theoretical way. In this section, the definition of fictitious economy is concluded, and the actual situation of Chinese stock market and housing market is elaborated. After this, the impact imposed by monetary supply on inflation in fictitious economy is analyzed according to the characteristics of Chinese stock market and housing market respectively. Thirdly, by using the seasonal data from the first quarter of 1997 to the first quarter of 2010, the empirical analysis is taken to research on the real economic situation of China. As a representative of fictitious economy sector, variable from Chinese stock market is applied. To some extent, the conclusion derived within this part verifies the theoretical analysis. Last but not least, main conclusions of the paper are reviewed and relevant policy suggestions are provided.