Impact Of Excess Money Supply On Chinese Inflation And Economic Growth

Since 1978, along with the rapid economic growth, China's average annual growth rates of money has been up to 20%. According to the Western tradition of the quantity theory, Chinese economy should be under tremendous inflationary pressures, but the price level is still in control. Mc Kinnon(1993) defined this excess money supply and lower prices-state phenomenon as "Chinese puzzle",in order to uncover this puzzle, Lots of Economists research on the excess money. Economists disputed on whether the money supply excessed and how to measure it,and the influence to economic. Based on the problem, we will study the impact of excess money supply to Chinese inflation and economic growth.In order to measure the excess money supply, we improved the tradition of the quantity theory, adding the velocity of money into the equation which is combined effected by the real economy and the virtual economy. Empirical analyses show that excess money supply really exist, but relatively to more literature study, excess money supply levels are overestimated. This paper use SVAR model to analyze the impact of the excess monetary relations to inflation and economic growth, combined with the structure of the impulse response and variance decomposition comprehensive analysis, test results showed that: economic growth has a negative impact on the currency over the same period, while inflation has excess money to the same period a positive effect; the impact of excessive money growth is positive in the short term, the long-term is negative; the impact on inflation of the excess money whether short-term or long-term effects are positive, short-term impact is more significant. The results of empirical analysis, put forward reasonable suggestions from the financial market development, foreign exchange reserve management, capital market supervision, and actively guide the positive effect of excess money in the economy, effectively prevent and suppress their negative effects.