The Quantitative Analysis Of Transmission Mechanism Between China's Money Supply And Inflation

Since this January, China's consumer price index (CPI) has gone up rapidly. The CPI, for the first time, was over 3% set by the government in April. In July, the official inflation rate was 3.3%. As the price keeps up, some economists predict that our CPI will reach 5.5% in November. Thus, we are facing a new round of inflation pressure. Meanwhile, sustained or over-inflation would play a destructive impact on the economy, society and people's life. Therefore, under the current market environment, the paper selects a topic concerning the inflation, which has both theoretical significance and realistic significance.The paper adopts a combined method of demonstration and normative analysis, theory and practice, and establishes measuring patterns and hypotheses on the basis of theoretical analysis and deducing. The national statistics would be used and processed. The paper unfolds according to the thought of "theoretical study-demonstration-result analysis-policy proposal" to ensure the validity of the research conclusion.The topic of the paper is transmission mechanism between money supply and inflation. The theory is based on their relation, that's, quantity theory of money. The analysis is made in terms of the credit transmission mechanism of the money policy as well as our concrete economic situation. Chapter one makes a brief introduction of the current research situation and its achievements from the angle of the cause of inflation and the demonstration of money supply and inflation. And the overall structure is also illustrated in the chapter. Chapter two first gives the definitions of money supply, inflation and other related concepts. Then, the chapter elaborates the quantity theory of money expressed by the equation of exchange, on the basis of which the relation between money supply and inflation is illustrated by graphs and analyzed by cases. It is concluded that our inflation remains a phenomenon of money. In other words, inflation is caused by over-supply of money. Chapter three, based on Chapter two, studies the transmission mechanism between money supply and inflation. The paper chooses such five index variables as money supply, the annual loans of financial institutions, the aggregate investment of fixed assets in the whole society, general purchase price indices of raw material, fuels and power (PPIRM), and CPI. With a sample of data from 1992 to 2009, the paper adopts such methods as co-integration method and Granger causality. It is concluded that there is a co-integration among these five variables. Moreover, the relation between the first four variables and the last one is one-way Granger causality respectively when the level of significance is 5%. Therefore, the transmission mechanism between money supply and inflation is as follows. It begins with money supply, is delivered to the annual loans of financial institutions, affects the aggregate investment of fixed assets in the whole society and PPIRM, and is finally sent to the CPI. Chapter four introduces management experience of inflation in developed countries like the USA, Japan and Russia. So we can draw on their advanced experience to deal with the inflation. Chapter five explains the characteristics of the new round of inflation. And some policies are put forward according to our state situation on the basis of analyzing the transmission mechanism pattern between money supply and inflation in China.