Abstract: By introducing the factor monetization process into the monetization model of Yi Gang(1995), this paper offers an interpretation of the phenomenon of the co-existence of higher money supply and lower inflation during the period of 1997-2006. The results of the bound cointegration test indicate that the factor monetization process has absorbed money, which proves the money cumulative effect in the financial markets. Based on the 13 states of the capital markets given by the extended capital market equilibrium model, it interprets the accumulation and moving of money between the factor market and the product market. It is found that the cumulated money in financial markets and the easy monetary policies after the crisis jointly formed the money pressure of 2007 inflation. To fight inflation, the total quantity of money should be controlled in the short run and the capital market system should be guided to recover equilibrium in the long run.

Key words: monetization; equilibrium model of capital market; bound cointegration; inflation