Analysis Of Effect Of Money Supply On Economic Growth

China has been experiencing rapid GDP growth since year1979. Theoretically speaking, part of the reason contributes to such rapid growth is macroeconomic regulation from government. As an important part of macro regulation, China’s monetary policy plays an indispensable role in economic growth. At present, China takes money supply as the intermediary target of monetary policy. Making research on the relation between money supply and economic growth has significant meaning. This paper mainly researches on the relation between money and GDP growth in China from year1975to2012.Throughout empirical analysis, this paper takes the Solow Residual to measure GDP growth, for the purpose of attaching more economic meaning to empirical result. The total output is determined by the equilibrium between total supply and total demand. Monetary policy pushes economy to a new equilibrium point through influencing total supply, making total output reach a new level finally. On the contrary, the input of reproduction factors mainly influences total supply. Usually, increase of input of production factors will make the total output increase as well. For this reason, Solow Residual is more suitable than GDP growth rate in research about influence of money supply on economic growth. Considering statistics meaning, Solow Residual excludes the growth rate of input of production factors from GDP growth. Considering economic meaning, what Solow Residual measures is the part economic growth which is not influenced by the input of production factors.Through empirically analyzing the relation between money supply and the Solow Residual in China, this paper figures out the relation between monetary policy and GDP growth in China, and makes comments on China’s monetary policy. The structure of this paper is as follows.This first part is introduction. Research background and meaning is illustrated. Existing research papers domestic and abroad are simply introduced, which includes papers focusing on Solow Residual and papers analyzing the effect of monetary policy. In the end of this part, research idea of this paper is illustrated. The second part mainly describes some basic theories which are relative with this paper. Firstly, it illustrates the Solow Growth Model, including the procedure from which Solow Residual is derived and the economic meaning of Solow Residual. Secondly, it introduces some important theories about monetary policy, pointing out the way monetary policy influences total output through AD-AS and IS-LM model. It also puts forward the main factors influencing the effect of monetary policy.The third part mainly contains two subsidiary contents. In the first content, it takes the production function derived from Solow growth model as the format of regression to make regression estimation, and gets the Solow Residual from the estimation result. In the second content, it introduces the Granger Test to examine the casual relation between money supply and the Solow Residual.The forth part focuses on the short-term relation between money supply and the Solow Residual. The empirical method for this part is mainly VAR estimation and pulse response. According to the empirical result, in short term, money supply has significant influence on the Solow Residual while the Solow Residual doesn’t have significant influence on money supply. Besides, the relation between these variables is positive direction. That is, the increase of money supply will lead to the increase of the Solow Residual. Such empirical conclusion suggests that China’s monetary policy is effective in short term, it has the capability to regulate economic growth.The fifth part mainly focuses on the long-term relation between money supply the Solow Residual. Through the Johansen test, it proves that cointegration relation exists between money supply and the Solow Residual. Then, the cointegration function suggest s that the cointegration relation between money supply and Solow Residual is positive direction. According to the empirical conclusion, in long term, increase of money supply is with the increase of economic growth rate in China, and decrease of money supply is with the decrease of economic growth rate.The sixth part is conclusion and policy suggestion. It makes the summary on the whole paper’s empirical results, and then makes some suggestion to China’s monetary policy considering current situation of China and according to this paper’s conclusion.The most important creativeness is taking the Solow Residual as the indicator to measure economic growth, while put aside the GDP growth rate. As an indicator, the Solow Residual has tow advantages for empirical research. Firstly, the Solow Residual doesn’t contain the input of production factor, so to exclude the influence of quantity of production factors on economic growth. In this way, the empirical research is more accurate and rigorous. Secondly, the Solow Residual has the particular economic meaning. When researching economic growth theories, economists always regarded the Solow Residual as a black box and analyzed it, from which they tried to figure out main sources of economic growth.