A Control Equation between Money Quantity Relations —Empirical Analysis Based on Chinese Data

Beginning from Friedman's original quantity theory of money with income velocity, by using the variable of the rate of change of monetization index of money to substitute the variable of the rate of change of income velocity of money, a new quantity equation of money is created. Because the new quantity equation of money is an equal equation between the four variables of the real economic growth rate, inflation rate, nominal growth rate of money, and rate of change of monetization index of money, it can be used as a control equation between these four variables. On this paper the empirical analysis is based on Chinese data of money M1 and M2. The time period is during the yearly period of 1993-2012. After building six vector autoregressive (VAR) models, the values of four variables in 2013 have been predicted. When the predicted values are led to the new control quantity equation of money, it has shown a consistent relation between the predicted values and the control equation for money M2. In 2013, the predicted value of the real economic growth will be 8.6%, the inflation rate will be 5.4%, the nominal growth rate of M2 will be 17.5%, and the rate of change of monetization index of M2 will be 1.8%. However, for money M1, only a predicted value interval can be determined, where the nominal growth rate of M1 will belong to the interval of (26.8%, 36.0%), and the rate of change of monetization index of M1 will belong to the interval of (10.7%, 18.9%).