An Empirical Study Of Relationship Between China’s Money Supply And Inflation

Since July2010, inflation pressure in China continues to increase. CPI climbed all the way from3.3%to5.1%in November, and subsequently has been fluctuating up and down at that level. Persistent inflation will have a serious negative impact on a country’s economic society, so inflation has become a priority among priorities in the work of the government. The background of the current round of inflation is that in response to the economic downturn since the2008financial crisis, the countries economies has been widely used by easing monetary policy, whether this is the real reason for China’s inflation is worth pondering. In this context we do the empirical study on the relationship between China’s money supply and inflation having more theoretical and practical significance.China’s money supply growth exceeds the level needed for economic growth for a long time. There is excess supply of money in the society. According to the quantity theory of money, there is a causal relationship between the quantity of money changes in commodity prices and changes in the monetary value, other things being equal, the fluctuation is proportional to the quantity of money and the price level of goods, but is inversely proportional to the level of monetary value. Based on this, this paper conducts an empirical study on the quantitative relationship between China’s money supply and inflation for2006-2012years, the main purpose is to analyze China’s money supply on inflation mechanism of action and the degree of influence, for the central bank to adjust monetary policy an empirical basis.In this paper, on the basis of existing theory and research literature, we analyze the amount of money and the price index mechanism, study the status quo of China’s money supply and inflation, then introduce the characteristics of China’s current inflation. On this basis, we do the empirical analysis of selected variables for data processing and the unit root test, then use VAR model analyzing the short-term dynamic relationship between the three angle analysis variables from the Granger causality test, impulse response functions and variance decomposition, followed by the use of co-integration testing the long-run equilibrium relationship between the analysis variables. The following conclusions:In the short term, M0, M1, M2on China’s inflation has no effect on long-term, MO has a negative effect on inflation, and M1, M2has a positive effect on inflation, but this positive effect is not obvious, and not a good reason to the status quo of China’s long-term inflation. On this basis, we analyze the empirical conclusions causes, pointing out that due to the combined effects of inflation expectations, the international impact and the virtual economy, the growth of the money supply does not directly translate into inflation. From increased product supply, we give the corresponding policy recommendations from increasing product supply, stabilizing inflation expectations, promoting energy market pricing reform and grasping of the flow of money supply reasonably on the basis of the above reasons has been summarized.