Empirical Research On The Effects Of Money Supply To CPI

After the financial crisis the quantitative loose monetary policy of the United States led to a general increase of prices all over the world and serious inflation. The developing countries were also affected. China, as the largest developing country, has huge foreign exchange reserves which led to a sharp rise in money supply and the pressure of domestic inflation. The central bank has difficulties in implementing monetary policy. Because of the dollar's international status and American developed financial market, the impact of the quantitative loose monetary policy on American domestic inflation pressure is not big, but it has a greater impact on China that has a lot of dollar assets. Therefore, it is necessary to study China and American money supply to their respective CPI and make comparisons.Firstly, the paper combined money quantity theory and used the actual data of China and the United States since 2001 to describe the changes of Chinese and America money supply and CPI respectively and analyse the characteristics and reasons of the effects of Chinese and American money supply to their respective CPI. And then the paper compared the money supply, CPI and the effects of money supply to CPI between China and America. It can be concluded that Chinese and American money supply can cause the changes of CPI, and in different times the growth rate of money supply had differences therefore the influence to CPI was also different.Secondly, this paper gave the adaptability conditions of smooth transition regression model based on the results of non-linearthe description of the effects of Chinese and American money supply to their respective CPI. Then the paper introduced STR model, set the nonlinear STR model for money supply and CPI and briefly compared STR with the linear model.Thirdly, this paper based on the linear VAR model to study the effects of money supply's increese to respective CPI increase between China and the United States and found that:In the error correction model, there is a difference of the lag period between China and the United States and the fitting results are not good. Then by using nonlinear STR model the paper found:the function relationship of China's money supply growth rate and CPI growth rate applied to LSTR2 model, while the function relationship of American money supply growth rate and CPI growth rate applied to LSTR2 model.According to the above results the paper drew the relevant conclusions:First, there are nonlinear relationships between money suppy and CPI, which showed that with the changes of money supply growth rate of China and America, the effect mechanisms of money supply to CPI also change; Second, the transformations of influence mechanism of China's money supply to CPI between nonlinear and linear was frequent compared with United States, so China should focus on the adjustment of China's money supply; Third, As U.S. has not put the money supply as an intermediate goal, the range of China's money supply's impact on CPI is smaller than American's, therefore it is easier to predict the impact of China's money supply on CPI.At last, the paper puts forward the following suggestions:Keep the general level of commodity prices steady and take preventing inflation as a primary goal of monetary policy; Control the scale and flow of money supply reasonably and strengthen the supervision; Money supply as a monetary policy objective still has adaptability, but we should consider to choose different intermediary goals according to the different stages of China's economic environment so that the monetary policy can play its role in controlling prices.