Explaining money demand in China during the transition from a centrally planned to a market-based monetary system

Abstract

Fundamental changes in institutions during the transition from a centrally planned to a market economy present a formidable challenge to monetary policy decision makers. For the case of China, we examine the institutional changes in the monetary system during the process of transition and develop money demand functions that reflect these institutional changes. We consider seasonal unit roots and estimate long-run, equilibrium money demand functions, explicitly taking into consideration the changes in the institutional characteristics of China's financial system. Using a newly compiled dataset that covers an unprecedentedly long period, 1984—2010, with quarterly frequency, we are able to draw conclusions on the transitions in households', firms' and aggregate money demand, on the role of the credit plan and interest rates, on the mechanisms of macroeconomic control during economic transition, and on theoretical questions in the development and money literature.