Abstract：The fluctuation of leading indicator precautions the macroeconomic direction and the early warning signal will make macroeconomic policies more forward-looking.Based on Markov-Switching Model with Time-Varying Transition Probabilities(MS-TVTP), this paper measures the early warning effect of monetary supply on China's business cycles phase transitions.We firstly calculates time-varying correlation coefficients between the increase of monetary supply(M2) and the climate index and conclude that the correlation coefficients between them increase gradually in the medium cycle and monetary supply has the stable feature of leading economic fluctuations.Introducing M2 into MS-TVTP model, the outcome shows that M2 predicts business cycles phase transitions and the recent decline of M2 indicates that the probability shifting to contraction phase increases.Central bank should adopt easy monetary policy to ensure our economy stable.

Keyword：Business Cycle; Phase Transition; the Increase of Monetary Supply; MS-TVTP Model;