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Money supply
Money supply and inflation impact and inflation
on economic growth impact
Dinh Doan Van
Faculty of Finance and Banking, Industrial University of Ho Chi Minh City,
Ho Chi Minh, Vietnam
Received 21 October 2018
Accepted 7 May 2019
Abstract
Purpose – At present, countries are concerned about inflation and the impact of inflation on each
country’s economic growth. This inflation has been said by economists that inflation is a phenomenon of
currency and currency, which has caused inflation in some countries by their monetary policy.
According to the economic theory of Karl Marx, Irving Fisher, Friedman, inflation is caused by a
continuous increase in the money supply.
Design/methodology/approach – The economic theories of Fisher, Friedman and an econometric
model are applied to analyse the relationship between money supply and inflation. Besides, Vietnam’s and
China’s research data are also collected in the period of 2012-2016.
Findings – It is found out that the continuous increase in the money supply causes inflation in the
long-term, but the continuous increase in the money supply growth does not cause inflation in a short
time, this was analyzed based on the theory of monetary quantity. Moreover, Chia’s and Vietnam’s
correlations of the money supply growth and inflation are 99.1 per cent. These correlations are very
close.
Originality/value – Research results show that money supply and inflation are closely related, and the
money supply directly affects economic growth. Therefore, the government should have the relevant
monetary policy to grow the economy and proposals to make monetary policy, control inflation levels and
stimulate economic growth.
Keywords Banks, Econometric and statistical methods, Government and the monetary system,
Economic growth, Inflation, Money supply, Money velocity, Monetary policy
Paper type Research paper

1. Introduction
Most policymakers have argued that the money supply causes inflation. Wherefore, some of
the countries were affected by hyperinflation such as Venezuela’s inflation of 652.67 per cent
in 2017, South Sudan’s inflation of 182.18 per cent in 2017[1]. How does the inflation affect
the economy? To clarify these impacts, it is considered as follows.
Inflation and interest rate: Why does the inflation impact on interest rate? Because the
real interest rate is calculated by nominal interest rate minus the inflation rate when the
inflation rate is high, the real interest rate is reduced and the nominal interest rate does not
increase according to the inflation rate. Meaning that the raising nominal interest rate will
have the consequence of an economic downturn and rising unemployment because the firms
are restricted their business size by the increased interest rate.
Inflation and real income: the real incomes of workers related to the inflation rate, when
the real income equal to nominal income minus inflation rate, thus, the inflation increases
but nominal income does not increase, so the real income of workers is reduced.
Journal of Financial Economic
Policy
© Emerald Publishing Limited
1757-6385
JEL classification – E51, E52, E58 DOI 10.1108/JFEP-10-2018-0152
JFEP Inflation and national debt: High inflation will cause an increase of the foreign debt of the
government because inflation has caused the exchange rate to rise and the domestic
currency becomes depreciated faster than the foreign currency.
Real interest rate, real income and foreign debt of the country affected by inflation lead to
a crisis economy. These issues are considered on the following hypotheses: If the
government faces high inflation or hyperinflation, how does the government apply
monetary policy? Why is the source of inflation caused by the continuous money supply
growth? Money supply and inflation are related with together? If the money supply does not
grow whether it causes inflation or not?
To clarify these issues, the research applied Irving Fisher’s and Friedman’s monetary
theory to analyze. In addition, the study also applied the econometric model to analyze the
relationship between inflation and money supply. For the monetary theory of Friedman and
Friedman, it is a balance between money and goods and services in one year’s GDP. The
research applied method of the velocity of circulation and the equation of exchange to
analyze.
For the galloping inflation or hyperinflation, this impacts badly on the economy.
Besides, there is the researcher’s theory and models that have demonstrated the
relationship between growth and inflation in a different point of view. It said that this
relationship is not one-dimensional, they are the interaction; if they want high economic
growth, they must accept inflation. However, this relationship has not existed forever and
they will achieve balance at any time, if the inflation continues to rise, the economic
growth will reduce. In the longer term, if the economic growth is approached the optimum
level, then the inflation will not impact on the growth anymore but the galloping inflation
or hyperinflation is a consequence of the excessive increase of the money supply in the
economy. These issues are solved to find out the inflation nature and the money supply
nature to grow the unshaken economy.
The target of the research is to assess the impact of money supply on the economic
growth. Simultaneously, the actual data of the money supply in the period of 2012- 016
of Vietnam and China are used to assess and compare the level of inflation and the
money supply growth that impact on the Nominal and real gross domestic product
(GDP). To analyze the impact of the money supply growth, the velocity of money,
inflation and GDP of each country, the method is applied by regression function and
equation of exchange.
In this paper, the author conducts the empirical analysis to study the effect of monetary
policy on CPI and GDP of two nations and determines the different impact of the monetary
policy on these nations. Moreover, the author also assesses the different impact of money
supply growth on each country’s inflation, i.e. money supply is changed, and it has little
effect on the CPI of the developed countries while the developing countries are greatly
affected. The author has applied the linear model and statistical analysis for time series data
from the period of 2012-2016 to evidence these issues.
To solve the money supply fluctuation, the author applied a linear regression model
to evaluate whether the money supply fluctuation impacts on CPI? And how does it
impact? Moreover, the results are the basis for demonstrating the relationship between
inflation and the money supply growth. The results suggest that the change in the
money supply affects the determination of inflation level in a developing country but it
does not affect the developed country’s inflation. Why may its impact be different? The
money supply growth has a great effect on domestic inflation in the developing
countries, but it affects little the inflation in the developed countries. The writer’s
results show that the major determinants of the developing countries’ CPI estimate are Money supply
the lower real GDP growth than the money supply growth. and inflation
This research has contributed the theoretical and practical values to the real values
of the goods and services consumption that are produced in a year, and indicated the
impact
money supply and demand through the monetary policy and found out the cause of
the inflation and money supply growth. These issues are concretized by the results of
the two countries’ forecast model and it is evident that money supply growth does not
cause inflation when money supply growth is controlled well by the government’s
monetary policy. Besides, the research results show that inflation is a phenomenon of
currency because the currency is fiat money that is not gold and silver standard. These
contributions play an important role in planning, orienting or setting an appropriately
adjusted monetary policy to promote the economic growth. The government should not
make the mistake decisions in monetary policy to control inflation and economic
recession. The remaining paper is organized as follows: Section 2 explains the data and
methodology of economics; Section 3 summarizes the results; Section 4 discusses the
findings and the Section 5 gives conclusions.

2. Methodology and data of research

For the impact of money supply and the inflation on economic growth, this research
considers theoretical and empirical views. According to the Keynesians argue that the
money supply has a positive relationship with the economic growth. Likewise, Irving
Fisher, who is an American economist explains the relationship between money supply
and economic growth by the exchange equation MV = PY. Besides, this research is
applied regression model to assess the relationship between the money supply and the
inflation by using two countries’ data that are Vietnam and China. Based on these
aspects, there are a number of empirical studies, which were done by the following
researchers.
A.L. Mohammed Aslam’s research “impact of money supply on Sri Lankan economy: an
econometric analysis,” the author considered the time series data from the period of 1959-
2013 and used two types of variables such as dependent and independent variables. The
author applied a regression model to analyze the impact of money supply on the Sri Lankan
economy. Here, the GDP was considered as a dependent variable and money supply,
exchange rate, exports earnings, imports outflow, the consumer price index in Colombo were
deemed as independent variables (Mohamed Aslam, 2016).
Authors: Ahmed, Q. M., Muhammad, S. D. Noman, M., and Lakhan, G focused on
studying the short and long run dynamics of inflation in Pakistan. By using Johansen Co-
integration Technique covering data from 1972-1973 to 2012-2013, the authors used
explanatory variables that are Consumer Price Index (CPI), Exchange Rate (ER), Government
Borrowing (GB), Non-Government Borrowing (NGB), Real GNP (RGNP), Indirect Taxes (IT),
Growth Rate of Money Supply (GMS), Import Price Index (IPI), Real Demand relative to
Real Supply (RD/RS) and Wheat Support Price (WSP) Money Supply (MS) as indicators.
The result shows a long run relationship among the selected variables. To assess inflation,
the authors also applied the regression model (OSL) (Ahmed et al., 2014). Besides that, there
are some studies also focused on analysis of money supply growth and inflation such as
money growth and inflation: empirical evidence from GCC region by Dr Ali Yousfat (2015);
GDP growth, money growth, exchange rate and inflation in Ghana by Chiaraah and
Nkegbe (2014); money, inflation and growth relationship: the Turkish Case by Bozkurt
(2014); testing the relationship between money supply and GDP in Bahrain by Seoud and
Abou (2014). Emerenini, Fabian M. (PhD) and Eke, Charles N’s investigated the
JFEP determinants of inflation in Nigeria using a monthly data from January 2007 to August
2014. The author applied the ordinary least square (OLS) method to analyze “The Impact of
Monetary Policy Rate on Inflation in Nigeria.” This author showed that expected inflation,
exchange rate and money supply influenced inflation in Nigeria within the period under
investigation (Emerenini and Eke, 2014). Otherwise, some authors also suggest that the
money supply affected the determination of the consumer price index because the money
supply is the direct money quantity in circulation and the analysis of the interaction of
money supply with the CPI in some countries’ economies such as relationship between
inflation and money supply, world crude oil prices impact on consumer price index (Dinh,
2018; Iya and Aminu, 2014; Chaudhry et al., 2015; Mbongo et al., 2014; Kumo, 2015; Ujiju
and Etale, 2016; Mbutor, 2014).
According to Sedigheh Atrkar Roshan’s research show that inflation has been one of the
main economic problems over the past three decades in Iran. This author investigates
the growth of the money supply (in terms of M1 and M2) and price nexus for Iran through
the cointegration and causality techniques. The author determines whether inflation in Iran
has been caused by excessive monetary expansion over this period or whether the money
supply has merely been passive in the inflationary process. The author also indicates that
there is a bidirectional relationship between the money supply (in terms of M1 and M2) and
price level (in terms of CPI). These findings are consistent with the view that in a high
inflationary economy, the inflation does have a feedback effect on money supply growth and
this generates a self-sustaining inflationary process (Mbutor, 2014). Sedigheh Atrkar
Roshan’s research also as like some authors’ research such as Mbutor O Mbutor; Omiete and
Onyemachi (2015), Dragos et al. (2013), Yunana et al. (2014), Ali et al. (2015), Wuyah and
Amwe (2016), Musa et al. (2014), Nazer (2016) and Ujiju and Etale (2016). The most of studies
also apply a simple regression model and a correlation coefficient. This model is used to
assess the correlation coefficient between the two variables and analyses the effect.
However, these studies have limited that analysis data only within the scope of a country.
To overcome this constraint the author uses data from two countries for comparison and
analysis. Simultaneously, the author focuses on the analysis of two factors that are the
money supply growth and consumer price index (inflation) to consider how the money
supply growth has the impact on the two countries’ CPI? the author applies data on the
money supply growth and inflation of two countries (Vietnam and China) to analyze the
macro policy that government should or should not increase money supply depend on GDP
growth or apply matching monetary policy.

2.1 The methodology of research

According to the quantity theory of money that has shown the relationship between the total
amount of money in circulation (M) with a total spending to buy final goods and final
services in the economy. According to Irving Fisher, the amount of money M (the money
supply) and the total amount of spending on final goods and services produced in the
economy P
Y, where P is the price level and Y is aggregate output (income). (Total P
Y
is also the nominal gross domestic product – nominal GDP).
The concept shows the relationship between M and P
Y is called the velocity of money
(P
Y
M ). i.e. the average number of times per year that money is spent in buying the total
amount of final goods and services produced in the economy. The quantity theory of money
is a theory of how the nominal value of aggregate income is determined. Because it also tells
us how much money is held for a given amount of income, it is also a theory of the demand
for money.
 The speed V depends on the method of payment (cash, credit or using money or book Money supply
debts, etc.) That is used in the transaction. This payment habits change slowly over time. So, and inflation
the velocity V would be normally stable in a short time. The other hand, the classical
economists (including Irving Fisher) said that wages and prices are completely flexible, so
impact
the total product (Y) is often at full employment (the level of potential output). Therefore, this
can be considered Y that is not changed in a short time. The result is the amount of money in
circulation (M) to increase, then Y and V does not change. So, the price (P) also increase the
proportion. Thus, according to the theory of classical economics, the price fluctuation is only
a result of the change in currency quantity (Mishkin, 2010).
The quantity theory of money tells us how much money is held by the level of total
individual income. This denotes formula of monetary demand by the equation of exchange
as follows:

1
M¼
P (1)
V

where: nominal income (P
Y), when the money market is in equilibrium, the quantity of
money (M) that people hold equals to the quantity of money demanded (Md), so the M in the
equation is replaced by (Md) and k is used to represent the quantity (1/V) (a constant because
(V) is a constant), we can rewrite the equation as follows:

M d ¼ k
PY (2)

With k ¼ V1 is a constant.
Besides, velocity (V) is defined more precisely as total spending (P
Y) is divided by the
quantity of money.

P
Y
V¼ (3)
M

By multiplying both sides of this definition by M into equation (3), we obtain the equation of
exchange, which relates nominal income to the quantity of money and velocity. Exchange
equation:

M
V ¼P
Y (4)

in which V is the velocity of money (i.e. The average number of times a year in which a
currency is spent for the purchase of goods and services in the economy in that year).
This equation shows that the transactions are generated by a fixed rate of nominal
income (PY) that is determined by the demand for money (Md). Thus, the monetary theory of
Fisher shows that monetary demand is purely a function of income and interest rate, but the
interest rate has no impact on demand for the currency because he believes that entities keep
the money to only transact and they are not freed to determine the monetary quantity that
they want to hold. The methodology is the basis to consider whether money supply and
inflation are related or not. This is explained in the Section 5.
Besides, the author applies OLS to analyze the explanatory variable and the relationship
between money supply growth and inflation. To apply the regression model, the data are
tested following hypothesizes such as the correlation coefficient; Hypothesis H0 and H1.
The hypothesis H0: the variable x has no relation to the y variable, i.e. the money supply has
JFEP no relationship with inflation. Hypothesis H1: variable x is related to y variable or money
supply is related to inflation. To reject H0 or accept H0 or statistically significant or not,
statistical results are tested by coefficients such as correlation coefficient; ANOVA; Sig;
t-test: paired two sample for means.
Thus, the correlation coefficient tested (r) is a statistical indicator that measures
correlations between two variables, such as (y) the Inflation (Inf) and (x) the money supply
growth (MS). The correlation coefficient is from –1 to 1. The correlation coefficient equals
to 0 (or approximately equal to 0) i.e. the two variables are not related to each other;
Conversely, if the coefficient is –1 or 1, the two variables have an absolute relationship. If
the value of the correlation coefficient is negative (r < 0) i.e. when x increases, y decreases
(and vice versa, when x decreases y increases); If the correlation coefficient is positive
(r > 0), it means that when (x) increases, then y also increases and (y) decreases, (x) also
decreases.
There are many correlation coefficients but the most commonly used correlation
coefficient is the Pearson correlation coefficient (r), and it is defined as follows: Given two
variables (x) and (y) from the sample (n), the Pearson correlation coefficient is estimated by
the formula:
Xn
i¼1 i
ðx  x Þðyi  y Þ
r ¼ qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
Xn Xn (5)
2 2
i¼1
ð x i  x Þ i¼1
ð y i  y Þ

The Pearson correlation coefficient test is used to examine the linear relationship between
independent variables and dependent variables. In the case of independent variables that are
closely correlated, we must consider multicollinearity when the regression analysis
(Hypothesis H0: coefficient of correlation is 0).
Besides, the statistical significance is tested by t-test: paired two sample for means. This
is used for the small sample size and tested the mean of the deviations between the two
variables (x) and (y) is different from zero. To have testing standards, the formula is applied
by:
Xn sX ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
ffi
n 
D ðXi  Yi Þ D i  D
t ¼ pffiffiffi in which: D ¼ i¼1
and SD ¼ i¼1
(6)
SD n n n1

The result of t is computed by equation (6), this result is compared with the percentile level
of both sides (t!/2) as follows:
 If |t| > t!/2, H0 is rejected and H1 is accepted.
 If |t| # t!/2, H0 is accepted and H1 is rejected.

In this study, the H0 hypothesis: b = 0 the money supply is not related to inflation. The H1
hypothesis: b = 0 the money supply is related to inflation.
To establish analysis regression model that is the study of the dependent variable on
one or more independent variables (explanatory variables) to estimate or predict the
mean value of the dependent variable that is based on values of the explanatory
variables. This article analyses two variables that are independent variables and
dependent variables, in which the per cent change of Inf (yt) variable is the dependent
variable, the independent variable is the per cent change of MS (xt), the regression model
is written as follows:
 ^y Inf ¼ a ^ xt þ v t
^þb (7) Money supply
and inflation
Xn impact
Yt :Xt  n:Y :X
^ ¼ X
In which: b t¼1
^ ¼ Y  b^ :X
and a
n 2
t¼1
X 2  n:ðX Þ

where: yt and xt are observations of t (t = 1 to n) of independent and dependent variables,

followed by a and b , which are unknown constants and will be estimated; and v t is the
unobserved error term and is assumed to be the random variable with certain
characteristics, (t is the time in the time series of data or the observation value in a series of
cross-data).
To calculate CPI, they are based on formulas as follows: in case of calculating the price
index, assuming that for individual item i, the price at the base period to be pi0, at the
observation period to be a pit, and quantity at the base period to be qi0. CPI (y) is calculated
by Laspeyres formula:
Xt
Pit qi0
CPI ¼ Xti¼1 (8)
P q
i¼1 i0 i0

The basic methods above are to apply to the analysis of the impact of money supply on the
consumption index of the two countries. The author’s object is to compare the consumption
index of the two countries to consider their differences while two consumption indices have
the same impact level of the money supply growth.

2.2 Research data

To analyze the effect of money supply on inflation, this paper uses the data of the two
countries on the time series data from 2012 to 2016. The time series data are five years, it is
sufficient to analyze the impact of money supply on inflation. Thus, the time series data are
collected from the World Bank as follows.
The consumer price index reflects changes in the consumer’s average expenditure under
the basket of goods and services during the period fixed by annual regulations. The data are
calculated by the Laspeyres formula.
Inflation index is measured by the consumer price index that reflects the percentage
change of the consumer’s annual average expenditure under the basket of goods and
services that fixed or changed in a certain time period. This data are also calculated by the
Laspeyres formula (Table I).
The GDP is the market value of all final goods and services within a certain national
scope and a certain period (a year). The data of GDP are calculated in local currency unit
(LCU). From the data in Table II, the authors apply the econometrics model to calculate the
results as below.

3. Research result
The correlation coefficient is a statistical measure that calculates the strength of the
relationship between the relative movements of the two variables. In the paper, the
correlation coefficient is a statistical tool used to measure the correlation between two
variables of inflation and money supply. The range of values for the correlation coefficient
JFEP bounded by 1.0 on an absolute value basis or between –1.0-1.0. The correlations of China
and Vietnam are measured as follows.
Therewith, the author also uses data in Table II to compute the VARIANCE and have
analysis table of variance (ANOVA). This table is to analyze the sum of squares (SS),
degrees free (df), mean square (MS) and Sig.
ANOVA of China’s data and ANOVA of Vietnam’s data are tested by econometrics as
follows (Tables III and IV):
Table of ANOVA is to divide the sum of a variable in a dependent variable (the variable
defined as the sum of the squares of the deviations from the mean of the variables) that is
calculated for the variable of the individual variables or groups of explanatory variables and
the unexplained variables such as residual variables. Analysis of variance is also a
statistical method for making simultaneous comparisons between two or more means; a
statistical method that yields values that can be tested to determine whether a significant
relation exists between variables.

P
Y
Year GDP (current LCU) Broad money (current LCU) Money velocity V ¼
M
2012 3,245,419,000,000,000 3,455,221,398,958,220 0.94
Table I. 2013 3,584,262,000,000,000 4,194,620,471,000,000 0.85
2014 3,937,856,000,000,000 5,022,639,327,367,210 0.78
Vietnam - gross 2015 4,192,862,000,000,000 5,771,436,493,824,790 0.73
Domestic product 2016 4,502,733,000,000,000 6,803,389,934,610,270 0.66
(GDP) and money
supply (M) Source: Author’s analysis

Vietnam’s
China’s GDP China’s broad GDP growth Vietnam’s broad
growth (annual %) money growth China’s (annual %) money growth Vietnam’s
Year Nominal Real (annual %) inflation Nominal Real (annual %) inflation

2012 7.86 5.19 14.39 2.67 5.25 9.09 24.54 9.09

2013 7.76 5.15 13.59 2.61 5.42 1.17 21.40 6.59
2014 7.30 4.90 11.01 2.40 5.98 1.89 19.74 4.09
2015 6.90 4.31 13.34 2.59 6.68 5.8 14.91 0.88
2016 6.69 4.26 11.33 2.43 6.21 2.97 17.88 3.24
Table II.
Broad money growth Sources: https://data.worldbank.org/country/vietnam, https://data.worldbank.org/country/china and author’s
and inflation ratio analyses

Model Sum of squares df Mean square F Significance

1 Regression 0.056 1 0.056 8,364.789 0.000b

Residual 0.0000201 3 0.00000669
Total 0.056 4
Table III. Notes: aDependent variable: China’s inflation; bpredictors: (constant), China’s broad money growth
China – ANOVAa Source: Author’s analysis, ANOVA of Vietnam’s data are also tested as follows
The coefficients table is for analyzing the coefficients such as the standardized regression Money supply
coefficients b , the Sig values. These values are used to analyze the forecast function and and inflation
examine the relevant research data. From data Table II, the coefficient results of China and impact
Vietnam are presented as follows.
From the above results, China’s forecast function between money supply and inflation is
established as follows:

^ Inf China ¼ 1:524 þ 0:08 X

Y

The analysis results of Vietnam’s coefficient between money supply and inflation are also
analyzed by the coefficients and b coefficients as follows.
Vietnam’s forecast function between money supply and inflation is also established as
follows:

^ Inf Vietnam ¼ ð12:226Þ þ 0:863 X

Y

To determine the relevance of the data, the hypothesis was tested by t-test: paired two-
sample with money supply growth and inflation of China and money supply growth and
inflation of Vietnam as follows.
For t-test results of Vietnam’s Broad money growth (annual per cent) and Vietnam’s
Inflation as follows.
Besides, for comprehensive analysis of the relationship between money supply growth
and inflation. Simultaneously, there is a comparison between the growth of money supply
and the inflation of Vietnam and China presented in the following figure.
The quantity theory of money and the actual data and the regression model (OLS) are
applied to calculate the velocity of money and exchange equation and explanatory variables.
The above calculation results lead to the discussion below.

4. Discussion
In 2012, China’s nominal GDP (P
Y) in a year is 54,036,742,814,450 CNY and the quantity
of money is 97,414,886,583,000 CNY, velocity is 0.55, meaning that the average CNY bill is
spent 0.55 times in purchasing final goods and services in the economy. Thus, the velocity of
currency in circulation shows that the quantity theory of money then implies that if M
doubles, P must also double in the short run because V and Y are constant. To calculate the
velocity of currency in circulation, we take the nominal value of the output (nominal GDP)
divided by the amount of money. The results in Table V point out that China’s currency
velocity is annual 0.55, 0.54, 0.52, 0.49 and 0.48. This shows that China’s currency velocity is
relatively stable, leading to very low inflation of China’s economy.

Model Sum of squares df Mean square F Significance

1 Regression 39.194 1 39.194 164.279 0.001b

Residual 0.716 3 0.239
Total 39.910 4

Notes: aDependent variable: Vietnam’s inflation; bpredictors: (constant), Vietnam’s broad money growth Table IV.
Source: Author’s analysis Vietnam - ANOVAa
JFEP For Vietnam’s currency velocity, in 2012, Vietnam’s nominal GDP is 3,245,419,000,000,000
VND and the quantity of money is 3,455,221,398,958,220 VND, velocity is 0.94, meaning that
the average 1 VND bill is spent 0.94 Times in purchasing final goods and services in the
economy. China’s currency velocity is 0.39 times faster than Vietnam’s currency velocity.
Moreover, Vietnam’s currency velocity is not stable, it annually increases 0.94, 0.85, 0.78,
0.73 and 0.66 times. Meaning that Vietnam’s money supply growth is faster than the growth
of goods and services in a year, leading to an increase in inflation of the economy. According
to Fisher’s view that velocity is fairly constant in the short run, this transforms the equation
of exchange in the quantity theory of money, which states that nominal income is
determined solely by changes in the quantity of money. In case, (V) and (Y) are constant, the
quantity of money (M) double lead to the double (P). However, change in the quantity of
money (DM) is greater than the change in goods and services (DY) [(DM) > (DY)] lead to
inflation in the economy.
In addition, to analyze the money supply and inflation, the article applies econometric
models to analyze, assess the impact and relationship between money supply and inflation
of the two countries’ economies that are China and Vietnam as follows.
The results of Tables IV and VII show that the correlation between money supply
growth and inflation is very close, with China’s correlation coefficient of 1 and Vietnam’s
correlation coefficient of 0.991. This case, the correlation coefficient is positive (r > 0), it
means that when X increases, then Y (nominal GDP) also increases and Y (nominal GDP)
decreases, X also decreases. Meaning that the change in money supply growth makes the
change in nominal GDP.
Besides, the objective of the variance analysis is to compare the multiple mean samples
and through hypothesis tested to conclude. However, after analyzing and concluding, one of

P
Y
Year GDP (current LCU) Broad money (current LCU) Money velocity V ¼
M
2012 54,036,742,814,450 97,414,886,583,000 0.55
2013 59,524,441,442,680 110,652,500,263,258 0.54
2014 64,397,404,820,340 122,837,482,925,283 0.52
2015 68,905,209,275,050 139,227,813,190,717 0.49
Table V. 2016 74,412,720,000,000 155,006,666,873,100 0.48
China - GDP and
money supply (M) Source: Author’s analysis

Model China’s inflation China’s broad money growth

Pearson correlation
China’s inflation 1.000 1.000
China’s broad money growth 1.000 1.000
Sig. (1-tailed)
China’s inflation . 0.000
China’s broad money growth 0.000 .
N
China’s inflation 5 5
China’s broad money growth 5 5
Table VI. Note: The data in Table II are also used for calculating the correlation coefficient of Vietnam as follows
Correlations – China Source: Author’s analysis
Model Vietnam’s inflation Vietnam’s broad money growth
Money supply
and inflation
Pearson correlation impact
Vietnam’s inflation 1.000 0.991
Vietnam’s broad money growth 0.991 1.000
Sig. (one-tailed)
Vietnam’s inflation . 0.001
Vietnam’s broad money growth 0.001 .
N
Vietnam’s inflation 5 5
Vietnam’s broad money growth 5 5
Table VII.
Source: Author’s analysis Vietnam correlations

the two possibilities is to accept the hypothesis H0 or reject the hypothesis H0. If we accept
the hypothesis H0, then it is expectations for the test. If we reject the hypothesis H0, it
means that the multiple mean samples are not equal. Therefore, the problem needs to be
further analyzed.
The results of table ANOVA (6), (7) of China show that the regression of China’s sum of
square is 0.056; the residual of China’s sum of square is 0000201; The regression of mean
square is 0.056 (0.056/1 df = 0.056); The residuals of mean square is 0.0000201/3 df =
0.00000669 (with n - 2); these results, it has F = 0.056/0.00000669 = 8,364,789 and p < 0.000.
These results are relevant researched data and it has statistic significance.
^ (slope) =
The results in Table VIII of China also show that the correlation coefficient is b
0.08 and the intersection at the vertical axis is a
^ ¼ 1:524. The linear regression equation is
written:

^ Inf China ¼ 1:524 þ 0:08

Y X

Meaning that the money supply growth is 1 per cent, the change in inflation of the
economy is 0.08 per cent. This result indicates that a change in money supply equates to a
change in (Y) (nominal GDP in China’s economy lead to very low inflation). This implies
that nominal GDP is approximately equal to real GDP, leading to a stable China’s
economy. From this forecast equation, the Chinese economy can forecast inflation in the
future.

Unstandardized Standardized 95.0% confidence

coefficients coefficients t Significance interval for b
Std. Lower Upper
Model b error b bound bound

1 (Constant) 1.524 0.011 136.382 0.000 1.488 1.559

China’s broad 0.080 0.001 1.000 91.459 0.000 0.077 0.083
money growth

Note: aDependent variable: China’s inflation Table VIII.

Source: Author’s analysis China – coefficientsa
JFEP From the results in Tables VII and IX, Vietnam’s economy is evaluated such as: for ANOVA
the regression of sum of squares = 39,194; residual of sum of squares = 0.716. The degree of
freedom is 1, regression of mean square is 39.194 (39.194/1 df), residual of the mean square is
0.239 (0.716/3 df with n-2). These results, it has F = 39.194/0.239 = 164.279 and p < 000. This
result is also relevant for the data. From Table IX, the b ^ is 0.863 (slope) and a
^ is 12.226
(intercept coefficients), leading to a forecast equation of Vietnam’s economy inflation, that
isY^ Inf Vietnam ¼ 12:226 þ 0:863 X. The forecast equation shows the impact of the
change in money supply on inflation in Vietnam’s economy. In the case, Vietnam’s money
supply grows 1 per cent, inflation grows to 0.863 per cent. Assuming (Y) (output) and (V)
(velocity of currency) are constant, the change in the money supply growth causes the price
of goods and services to rise.
The comparison between the Chinese economy and the Vietnamese economy shows that
China’s economy is not inflated, the commodity and service prices are stable. Contrariwise,
Vietnam’s economic growth is unstable, the change in money supply growth is greater than
the change in the growth of goods and services, leading to volatile prices and inflation in the
economy.
According to this study, the H0 hypothesis: b = 0 the money supply is not related to
inflation. The H1 hypothesis: b = 0 the money supply is related to inflation.
The hypothesis test results of China and Vietnam in Tables X and XI show that H0 is
accepted or rejected. For China’s hypothesis test: |t| = 16.72337 > ta/2 = 2.776445 and
Vietnam’s hypothesis test: |t| = 51.07364066 > ta/2 = 2.776445. In this case, H0 is rejected and

Unstandardized Standardized 95.0% Confidence

coefficients coefficients t Significance interval for b
Std. Lower Upper
Model b error b bound bound

1 (Constant) 12.226 1.345 9.093 0.003 16.505 7.947

Broad money 0.863 0.067 0.991 12.817 0.001 0.649 1.078
growth Vietnam
Table IX.
Vietnam – Note: aDependent variable: Vietnam’s inflation
co-efficientsa Source: Author’s analysis

Model China’s broad money growth (annual %) China’s inflation

Mean 12.7337422 2.538722079

Variance 2.194411053 0.013980007
Observations 5 5
Pearson correlation 0.999608321
Hypothesized mean difference 0
df 4
t stat 16.72337
P(T < = t) one-tail 0.00003746
t Critical one-tail 2.131846786
P(T < = t) two-tail 0.00007492
Table X. t Critical two-tail 2.776445
t-Test: Paired two
sample for means Source: Author’s analyses
Model Vietnam’s broad money growth (annual %) Vietnam’s inflation
Money supply
and inflation
Mean 19.69460662 4.778961698 impact
Variance 13.15784607 9.989800947
Observations 5 5
Pearson correlation 0.990901619
Hypothesized mean difference 0
df 4
t stat 51.07364066
P(T < = t) one-tail 0.00000044
t Critical one-tail 2.131846786
P(T < = t) two-tail 0.00000088
t Critical two-tail 2.776445105 Table XI.
t-Test: Paired two
Source: Author’s analyses sample for means

accept H1 with b = 0. This means that the change in China’s money supply growth is related
to inflation and the change in Vietnam’s money supply growth is also related to inflation.
Figure 1 shows a comprehensive analysis of the relationship between money supply
growth and inflation in China’s economy and Vietnam’s economy. The money supply
growth and inflation in Vietnam’s economy have the uniform and positive annual
fluctuation, meaning that the change in money supply growth equals the change in inflation
yearly. The money supply growth and the inflation of China’s economy do not have the
uniform fluctuations, but the fluctuation of the two variables are positive. Meaning that the
variable of money supply growth fluctuates greater than the variable of inflation because of
China’s good monetary policy execution.
The analysis results above show Vietnam’s stable GDP growth from the year 2012 to the
year 2016 that is 5.25, 5.42, 5.98, 6.68 and 6.21 per cent. However, the monetary growth
grows for a long-time leading to inflation, but inflation is still controlled by the government.
The annual GDP growth is just nominal GDP, this shows that the nominal GDP is growing
by money supply growth. In case the economy is estimated by real GDP, the economy not
only does not grow but also declines in fact.
The result in Table I also shows that China’s nominal GDP is 7.86, 7.76, 7.30, 6.90 and
6.69 per cent, and the real GDP is 5.19, 5.15, 4.90, 4.31 and 4.26 per cent in the period time
series 2012, 2013, 2014, 2015 and 2016, and China’s annual nominal GDP has fallen.
However, the annual real GDP has gone down very low. Vietnam’s annual real GDP is 9.09

Inflation and money supply growth (Vietnam - China)

24.00
20.00
16.00
12.00
8.00
4.00 Figure 1.
- Relationship between
2012 2013 2014 2015 2016 Inflation and money
China's Broad money growth (annual %) China's Inflation
supply growth:
China – Vietnam
Vietnam's Broad money growth (annual %) Vietnam's Inflation
JFEP per cent, 1.17 per cent, 1.89 per cent, 5.8 per cent and 2.97 per cent in the period time series
2012, 2013, 2014, 2015 and 2016. The results of Vietnam’s annual real GDP is much less than
the annual nominal GDP because of high inflation.

5. Conclusion
The monetary policy plays an important role in and impacts on the economic growth directly.
However, to develop the sustainable economy, the government must make macroeconomic
stability and price stability. In recent years, the money supply growth is one of the main
reasons causing the inflation in Vietnam. The high inflation does not only affect the
production and business activities of enterprises but also negatively impacts on the life of
people and causes pressure for the entire economy. Therefore, to solve the current problems
of inflation, we should pay close attention to the solutions of the money supply.
Firstly, the money supply should be calculated accordingly with the goal of GDP growth
and inflation targets. The money supply has impacted on the GDP growth and inflation, so
the tools of monetary policy must be necessarily established in the high correlation with
other variables in the medium-term framework. On that basis, we can accurately determine
the demand for money to have suitable money supply and avoid excessive money supply in
the economy. If the indicators of the money supply growth are more accurate calculations, it
will help to curb the inflation, stabilize the value of the domestic currency.
Secondly, in the year 2012 and 2013, when the inflation increased, the central bank
withdrew money through the sale of bonds and the required reserve ratio was increased.
However, under pressure to ensure the liquidity of the banking system, the central bank had
to supply money to meet the payment demand of the commercial banks and purchase the
foreign currency to maintain the exchange rate, those lead to the inflation increase.
Thirdly, there are many tools used to regulate the money supply, it is the required
reserve ratio, open market operations, the central bank interest rate, etc. So, the central bank
should consider carefully timely the adequate monetary policy to avoid causing the negative
impacts or shocks to the economy.
Fourthly, the quantity of money is more than the output leading to the inflation. Therefore,
we must improve the efficiency of capital investment. Especially, the state economic sector
should be concerned. Currently, the efficiency of capital investment in the economy, especially
in the state sector is still low and Vietnam’s ICOR is higher than other countries’ ICOR in the
region. To improve the efficiency of investment capital, the balance between the velocity of
money and GDP growth is considered as long-term solutions to minimize the pressure on the
money supply leading to the increased price of goods and services.
Finally, besides the monetary reasons, the inflation of Vietnam’s economy is affected by
other factors such as cost-push, demand pull, psychology, etc. Therefore, to overcome the
high inflation, we need to have good solutions of monetary policy, fiscal policy, restructure
the reasonable economy. Thus, we can maintain stability and economic development in the
long-term.

Note
1. www.statista.com/statistics/268225/countries-with-the-highest-inflation-rate/

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Corresponding author
Dinh Doan Van can be contacted at: citydinhninh@yahoo.com and doanvandinh@iuh.edu.vn

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