Author(s)

Xiaojing Zhang

Corresponding Author

Xiaojing Zhang

Abstract

In order to test if China’s economic growth is driven by the monetary supply, this paper does an empirical study of the relationship between GDP and M2 increment over the period of 1990-2016 based on the co-integration analysis approach, error modifying model and Granger causality tests model. It is found that LGDP and LM2 have equilibrium relationship in the long run. Moreover, if ZM2 increases by one percent, GDP will increases by 0.928085 percent in the short run. LM2 does not Granger causes LGDP while LGDP doing Granger causes LZM2 with 5 lags. As a result, ZM2 can drive GDP powerfully in the short run, but this effect will weaken rapidly in the long run and GDP can drive ZM2 inversely in a way.

Keywords

Economic growth, Monetary supply, GDP, ZM2, Co-Integration analysis