A Study On The Relationship Between Money Supply And Economic Growth In China

Monetary policy refers to the central bank in order to achieve certainmacroeconomic goals of all kinds of regulation and control of the total money supplyand credit policies and measures，it is an important part of macroeconomic regulationand control policy．“decision on reform of the financial system”promulgated in1993，have the provisions of“the intermediate target of monetary policy and operationalgoal is the money supply，the total amount of credit, interbank lending rates and bankreserve ratio．”“Law of the People′s Bank of China”promulgated in1995，also hasthe provisions that“the people′s bank of China，under the leadership of the statecouncil，formulate and implement monetary policy to prevent and defuse financialrisks and maintain financial stability．Monetary policy goal is to maintain the stabilityof currency and thereby promote economic growth，”the people′s bank of Chinabegan to tentatively put the money supply into the system of the intermediate target ofmonetary policy．the people′s bank of China officially incorporated the moneysupply into the system of the intermediate target of monetary policy in1996，andcanceled the provisions about the state-owned commercial bank loan quota control，begin to implement and enforce the16-character guideline“planning guidance，self-seeking balance，proportion management，indirect control”on the basis of riskmanagement and asset-liability ratio management in1998．This series of measuresmark that the people′s bank of China make money supply instead of mandatory loanprogram as the intermediate target of monetary policy，and monetary policy is alsofrom giving priority to direct regulation with the credit scale control to the priority ofindirect regulation with the total monetary management．At this point，the centralbank′s indirect regulation system has been initially formed．Under the above background，the relationship between money supply andeconomic growth in China has become the important issue of common concern in thetheory and decision-making departments．Therefore，based on the relevant theory of western monetary supply and economic growth，focusing on the combination ofChina′s reality in recent years and through the empirical analysis of a large numberof realistic data to research the relationship between China′s money supply andeconomic growth， after forming the basic judgment about money supply andeconomic growth correlation，again according to the general operation mechanism ofmonetary policy transmission，combining with current situation and requirement ofChina′s economic development，it has become an inevitable topic of this study toprovide policy recommendations for the scientific formulation and effectiveimplementation of China′s monetary policy．It has important theoretical and realisticsignificance for the important role of monetary policy in the national macroeconomicregulation and control system to achieve the sustainable， healthy and steadydevelopment of national economy．The principal conclusions of this analysis are asfollows：1、Because we choose the real variables of deducting the price factor，there existsa long-term equilibrium relationship between GDP and whether M1or M2，it showsthat in the long sense，money beyond economic growth need convert into higherprices，so money is neutral from a long-term point of view．2、There exists a two-way granger causality relationship between the moneysupply lnm1and economic growth from the Granger causality test，and impulseresponse function analysis further confirm the“two-way causality relationship”，thisshows that M1in our country has a closer relationship with macroeconomic．This isbecause，the narrow money M1is the sum of cash in circulation and demand deposits，and the broad money M2refers to the narrow money M1plus time deposits，savingsdeposits and other unit deposits，M1is the leading indicators of economic cyclefluctuation and has strong liquidity compared with the M2，its change reflects thestrength of the liquidity in money market，thereby it more closely linked withmacroeconomic，and also is the main object of the central banks to control moneysupply．3、From the impulse response function analysis，the impulse response of money supply lnm1to itself and economic growth fluctuates in the short term but is stable inthe long term．Economic growth impact to itself and the money supply to economicgrowth is positive．From the variance decomposition，the explanation ability of moneysupply to economic growth strengthens gradually，the interpretation ability of theeconomic growth to the money supply lnm1and lnm2although fluctuate，but tend torise on the whole．This shows that economic growth significantly affect the growth ofthe money supply．At the same time，economic growth and money supply contributionto their own degrees is decreased in the long term．...