Demand for money in China

by Qing Zhang

Institution: University of Greenwich
Year: 2006
Keywords: DS Asia; HG Finance
Record ID: 1393297
Full text PDF: http://gala.gre.ac.uk/8251/


This research investigates the long-run equilibrium relationship between money demand and its determinants in China over the period 1952-2004 for three definitions of money – currency in circulation m0, narrow money m1 and broad money m2. The appropriate dummy variable has been added into the functions to assess and evaluate effects of economic reform in China. The additional influences on money demand in China, such as wages, monetization process and saving effects are explored. The real wage index w, the ratio of urban population to total population ROP, the ratio of total deposit to currency DCR, and the ratio of total deposit to income RDG have been considered as additional variables in the same money demand functions. To test the stable long-run money demand functions, the Engle-Granger two-stage cointegration method (EGTS), Phillips-Hansen cointegration approach, Pesaran et al. (2001) ARDL cointegration procedure along with CUSUM and CUSUMSQ stability tests and Johansen Multivariate Cointegration procedures are employed. Granger Causality Test is applied to indicate either uni-directional or bi-directional causality exists in the variables. Wald tests for homogeneity and parameter constancy tests are employed in this study as well. The estimation results, especially the cointegration analyses show that the real money demand functions perform better than the nominal money demand functions. Narrow money demand m1 presents more satisfactory coefficients than the other two in terms of economic theory and econometric diagnostics. The stabilisation policy should primarily aim at the narrow money m1. This study reveals that the economic reform did bring significant changes to the Chinese economy. Income is shown to be the most important determinant of money demand. The other additional variables also have significant effects on the money demand. The wage index influence on money demand models is important. The raise of monetization process made the money play a more vital role. The impact of ratio of total deposit to income is significant.