A Study on the Relationship between Money Supply and Macroeconomic Variables in China

Abstract Many scholars have examined the importance of the money supply to the macroeconomics in developed countries. However, few studies have explored this proposition in developing countries. So, in this paper, annual series data from 2000 to 2016 is applied to analyze the relationship between the money supply (M2) and the macroeconomic variables (the real GDP, the inflation rate & the interest rate) under the vector auto regression (VAR) model in China. The purpose of this paper is to verify the impact of these variables on the money supply in China. After performing an empirical analysis, conclusions can be obtained that an increase in the real GDP can result in an increase in the money supply; Also, an increase in the inflation rate can lead to an increase in the money supply; Conversely, an increase in the interest rate can cause a decrease in the money supply. Therefore, via adjusting the change of real GDP, inflation rate and interest rate, a better control of the money supply can be performed for the policy-makers in China.