Abstract: Based on unit root testing, co-integration testing and Granger causality testing, a state space model is used to carry out an empirical study on the relationship between the scale of national debt and money supply in China.The main conclusion is that expansion of the scale of national debt has caused the growth of money supply, and its elasticity coefficient shows a tendency of fluctuating increase. We should closely watch the financial function of national debt inorder to coordinate the implementation of the monetary and fiscal policies.

Key words: co-integration, money supply, state space model, scale of national debt