Quantitative Analysis Of The Effect Of Inflation In The Money Supply

This paper presents empirical analysis of the correlation and quantitative relationship among inflation rate, real output growth rate, money supply growth rate in long-term model and short-term model. By empirical analysis based on cross-section data and panel data, we have several findings, which can provide suggestions on monetary policies for controlling inflation more effectively.First, in the long term, the correlation between real output growth and inflation rate is not significant, and the long-run money neutrality is confirmed in this model; otherwise, real output growth rate and inflation rate have a significantly negative correlation in the short term, and monetary policies to control inflation will affect the real output in the short term. Second, money supply growth rate and inflation rate have a significantly positive correlation both in long term and in short term; and the adjustment of monetary policies can affect inflation. Third, among the three caliber of money supply represented as M1, M2and M3, M1has the most significant correlation with inflation rate. Little change in Ml can lead to substantial change in inflation rate, so the central bank should prudently determine the magnitude of M1growth adjustment when implement inflation-control monetary policies, and shift monetary policies timely in a suitable way when inflation is brought under control, avoiding over-adjusting inflation rate and causing deflation as a result.