Money supply, output gap and economic fluctuations: evidence from quarterly data in China

Considering the endogenous structure of the aggregate supply curve, Okun's law, and the monetary output effect, this paper calculates the Chinese quarterly output gap between 1995Q4 and 2017Q2 using an SVAR model based on the inflation rate, real output, the unemployment rate and M2. Then, we reveal the influence of the time-varying characteristic on the real output using a TVP-SVAR-SV model. First, China's economy has experienced four rounds of fluctuations since 1995, and the fluctuations became stationary after 2011Q1, which is consistent with the main feature of 'great moderation'. Second, there was an asymmetric relationship between the volatility of output and money supply after 2000Q4, and the anti-Tobin effect became obvious after 2003. The shock of inflation aggravated the negative impact on output. Third, the output effect of easy monetary policy sharply decreased, and the response cycle shortened following the global financial crisis. Therefore, stimulus policy should be implemented cautiously.