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

Most nations in the world were striving to get rid of the global economic crisis before2010, whereasthe economy of China had been keeping growing with a high speed. From then on, however, inflationbegan to emerge in China and it tended to be increasingly serious. Particularly, the value of CPI hadfluctuated around5.1%for a long time since it reached to this percentage in November2010. Inevitably,the long-term inflation may bring heavy economic trauma to a nation. As a result, introducing effectivepolicies should be the primary problem of the government work. It is known that the2010inflation is theconsequence of loose monetary policy caused by the reaction of the government to financial crisis.Nevertheless, the question whether loose monetary policies should be responsible for currency inflation isworth thinking about.There have been a large number of researches on currency supply and inflation. According to traditionalquantity theory of money, there is a certain relation between general price level and money supply. Therelationship between the value of currency and money supply also exists. Under the assumption the otherfactors equal, general price level and currency value show adverse relations responding to currency supply,respectively. As far as our country, the phenomenon of super currency exists for long period. It means thatthe quantity of currency in Chinese market exceeds the need of economic growth. It creates convenientconditions for the research on inflation mechanism and the relationship between money supply andinflation under Chinese system. It is hoped that this research may supply realistic basis to Chinesemonetary policy.This article analyses the effect between money supply and CPI based on current researches. Summariesof the reason and characteristics of inflations are indicated according to describe the current situation ofmoney supply and inflation. Three methods (Unit root test, Co-integration test and the Grainger test ofcausality) are introduced in this research on the relationship of the two to find out that money supply fullyexplains the increase of price index with monthly data of2011. According to the empirical results revealedby the data between1994and2012, during the period of around20years, the quantity of money suppliedseems not to fairly explain periodic inflation in China. This conclusion is identical with Chinese economy. After reform and open policy, the growth rate of money supply was shown to be higher than that of the sumof economy and inflation. During that time, high money supply failed to cause inflation. According toempirical results, as a consequence, money supply cannot directly give rise to inflation because of thecombined effects of Inflation expectations, the international impact, and virtual economy. In addition, thisarticle supplies some suggestions as to product supply increase, inflation expectation stabilities, energymarket pricing reform, and reasonable grasp monetary supply flow.