A Study On How China’s Money Supply Changes Affect Inflation Expectations

As the intermediate target for monetary policy, money supply has become thesignificant means of the Central Bank to achieve long-term goals. Especially afterexperiencing the outbreak of the financial crisis, the central bank adopted a moderatelyloose monetary policy in order to stimulate the economy’s recovery, so money supplyincreased dramatically. According to the view of monetarism, the increase in moneysupply finally causes price changes, and inflation is the monetary phenomenon withoutexception. Whether the Central Bank that takes moderately loose monetary policywould raise public expectations of inflation, which lead to inflation additionally?Which kind of monetary rules does the Central Bank need to adopt so as to realize therequirement on financial stability and economic growth, and not raise the publicexpectations of inflation simultaneously? The solution of these problems will berealistic and directional significance for the development of our national economy.Based on the above-mentioned problems, this paper analyzes the effectstheoretically and empirically that the variance of money supply cause to expectationsof inflation, referring to researches about scholars from home and abroad. First, takean overview of the money supply, including money multiplier and currencyendogenous and exogenous description, introduce the correlative theory ofexpectations of inflation, summarize the factors affecting public expectations of ourcountry currently, and theoretically analyzes the mechanism that changes in moneysupply affect the expectations of inflation. Secondly, outline the status of moneysupply directly, estimate the expectations of inflation, and take the correlativelygraphic analysis on both the money supply and expectations of inflation. Finally, makean empirical test and analysis on China’s data by using SVAR, what can be obtainedare as follows according to the empirical results: in sample interval, fluctuations ofChina’s monetary supply have a long-term and positive co-integration relation withexpectations inflation, the results contributed by granger causality test also show thatthere is a two-way and long-term causality relationship between fluctuation in themoney supply and expectations of inflation. Through adopting the impulse responsefunction and variance decomposition, there exist certain time lags which thefluctuation of money supply has influencing on public expectations, but thecontribution of the indicator is relatively higher and stable. Eventually, this paper raises suggestions to the Central Bank on makingreasonable rules in the growth of money supply, improving the transparency ofmonetary policy, strengthening the sharing of information, stabilize the real estateprice in order to guide the public having reasonable expectations of inflation.