Explaining the relationship between money supply and inflation with the theory of money quantity

After China's economy achieved a "soft landing" on 1996, new trends and characteristics appeared in macroeconomic operation. The new economic cycle begins with the peak of economic growth rate, and then the economic growth rate gradually falls back and tends to be flat, thus forming a long tail. There is significant asymmetry in the economic cycle before the peak and after the trough. As China's economy is in the stage of decreasing economic volatility, weakening economic vitality and insufficient total demand, at this time, policy makers are no longer worried about the "stagflation" of prices and growth that is easy to form in the traditional economic contraction stage, but about the "stagflation" of price level contraction and economic growth stagnation. It is for this reason that we have made various econometric analyses on the relationship between the growth rate of money supply and the inflation rate in China. Through the above analysis, we draw the following three basic conclusions and monetary policy enlightenment.

First of all, under the goal of stabilizing policy, we prove that the separation between the growth rate of money supply and inflation rate is formed by demand shocks and currency shock, so we suspect that the reason for the decrease of price inflation effect of monetary policy at present is the reverse demand shocks and currency shock. In this regard, we use cointegration relationship and ECM model to test respectively. The test results show that there is a positive long-term cointegration relationship between the growth rate of money supply and the inflation rate in China (see cointegration equation (15)), which shows that China's monetary policy still has the ability to ultimately influence the price level, and monetary policy is still the main policy way to adjust the price level. In the long-term equilibrium relationship expressed by cointegration equation (15), the multiplier of money stock level to inflation rate is 0.983. After the difference, it shows that 98% of the growth rate of money supply will shift to price inflation, and the long-term neutrality of money variables is still obvious. Therefore, the future economic growth still depends mainly on the expansion of the actual economic scale. At present, we should continue to adjust the total demand and promote the rapid economic growth by cultivating and realizing the total demand.

Secondly, by separating supply shock and currency shock, we find that there are obvious signs of these two shocks in the economy at present, and the direction of the shocks is opposite to the direction of price changes, which is the main reason for the slight deflation and the reduction of nominal effect of monetary policy at present. In the ECM model, the overall effect (sum of regression coefficients) of various shocks is opposite to the growth rate of money supply, which clearly reflects the influence direction of economic shocks on money supply and price level. The result of ECM model estimation shows that the short-term fluctuation between the growth rate of money supply and the inflation rate has brought about a significant deviation between them due to the dual effects of demand shocks and currency shock. Insufficient total demand leads to the inability of the economy to achieve flexible quantitative adjustment, and often nominally adjusts prices downward; The decline of nominal interest rate and price level increases the uncertainty of future income expectation, and also increases the currency holdings of residents' consumption and slows down the currency circulation. In addition, the volatility of the current demand shocks and currency shock intensity has also obviously weakened (see Figure 6), which is not only a sign that the gap of insufficient aggregate demand has not widened, but also a reflection of the positive color components of prudent monetary policy.

Finally, although the current currency velocity shock and demand shocks show no signs of further expansion, they do not show the characteristics of rapid convergence to equilibrium. The stability of economic shock shows that inflation rate, like economic growth rate, will form a relatively stable stage, which means that deflation, like inflation, will last for a period of time once it is formed. Therefore, the impact of active monetary policy on the price level will also be a long process. Corresponding to the "soft landing" of China's economy, China's economic expansion in the future will also be "soft expansion". With the short-term deviation between the money supply and the price level caused by demand shocks, China's economy will be accompanied by the slow recovery of the price level in the period of "soft expansion". Therefore, based on the influence mechanism of monetary policy on the change of price level, we should try our best to prevent the nominal interest rate from falling further in order to maintain the opportunity cost of money holding and increase the money supply moderately. By reducing liquidity restrictions and triggering positive currency shocks; Activating the deposit of money stock in the asset bubble and releasing some illiquid money holdings will help alleviate deflationary pressure or prevent deflation from spreading.