The determinants of money demand in China

Abstract

Money demand and its stability have a great impact on the economy of a country. Because China's financial and monetary system has been in reform, there are many uncertainties in money demand. Especially, China's money demand has its own particularity. This paper studies the determinants of China's money demand through building a linear econometric model and SVAR model. The empirical results show that China's money demand is mainly decided by income, interest rate and expected inflation rate. However, other factors, such as financial innovation, government debt, capital mobility and currency substitution, play a relatively small role, mainly because China's financial and monetary system has been under reform. The regression results of sample data from different periods show that money demand in China is unstable, indicating that China's macro-economy has certain risks. This finding suggests that China should adopt prudent financial and monetary policies to cope with the uncertainty of money demand in the future.

The Variables Affecting The Volatility of E-Money in Indonesia and Thailand

“…3) with E-money as the dependent variable and EG, R, INF, and REER as independent variables. The result showed that EG is statistically significant in Indonesia and Thailand based on various studies [2], [5], [7], [12], [14], [11], [15], [16], [9], [10]. This finding explains that an increase or decrease in economic growth (EG) will affect the increasing or decreasing of e-money.…”

“…In the short run inflation and exchange rate have a significant effect on the money demand [5], [8], [12], [13]. In the long run real income have a significant effect on the money demand [5], [7], [12], [14], [11], [15], [16], [9], [10].…”

China's money demand in a cointegrating vector error correction model

“…Further measurement issues arise from transaction (or scale) and opportunity cost measures entering money demand itself. For the former, different income measures are employed, such as national income (Chow, 1987), real national income per capita (Yi, 1993) or real GDP (He, 2017;Huang & Huang, 2017;Dou, 2018). Opportunity costs measures mostly differ in maturity of interest rates employed.…”

“…Wu (2009) does not find significant effects of exchange rates on money demand but instead find evidence of a positive impact of expectations of Renmimbi appreciations since 2005 on money demand. However, Dou (2018) rejects the impact of both expected exchange rates and capital mobility on Chinese money demand, as tightly controlled capital and foreign exchange markets implied little variation and therefore limited information contained in such measures. Alternative attempts to control for the financial deregulation effect after 1994 using dummy variables have been unsuccessful.…”

“…However, such models suffer from simultaneity bias, as the ordering of causal effects between variables is often unclear. Structural vector autoregressions, such as in Dou (2018) can overcome the simultaneity bias but often establish causality by imposing recursive identification restrictions that are sensitive to the ordering of variables.…”