Empirical study on the influence factors of Chinese money supply fluctuation based on VAR model

Abstract

This paper analysis GDP, commodity prices, foreign exchange reserves and issuing amount of stock's influence on broad money supply(M2) by using unconstrained vector auto-regressive (VAR) model. Through Johansen co-integration test, impulse response function analysis and Granger causality test, the author finally thinks that there is a long-term equilibrium relationship between the four variables and Chinese M2. GDP, the foreign exchange reserves and issuing amount of stock are the Granger reasons of M2. Commodity prices will have positive impact on M2 in the short-term, but it's not the Granger reason of M2. GDP and foreign exchange reserves have long-lasting positive impact on money supply, while issuing amount of stock has both short-term negative impact and long-term positive impact on M2.