Due to the access of high proportion of new energy in microgrid, distributed generation cannot provide inertia and damping for the system like synchronous generator (SG). The system has low inertia and weak damping characteristics, which has a great impact on the frequency and voltage stability of the system. The virtual synchronous machine (VSG) can make the grid connected inverter perform the frequency modulation and voltage regulation characteristics of the synchronous machine through control. Therefore, an optimal control method of VSG based on improved power control loop is proposed. The structure model of microgrid with VSG is established, and the control schemes of outer power loop and inner voltage and current loop of VSG are designed. In the active power loop, the lead lag link is designed to solve the contradiction between the dynamic response speed and the static control accuracy of the traditional VSG inertia damping control; in the reactive power loop, a correction link is designed to compensate for the influence of power coupling on reactive power response speed in traditional VSG control, improve the dynamic response speed of reactive power, and suppress the oscillation of active power and reactive power. Finally, the simulation model of microgrid is established in MATLAB. The simulation results verify the effectiveness of the proposed control method.