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. Espec...
Highlights
In the standard money demand model, money demand is determined by real income, interest rate and expected inflation rate
The empirical results show that China’s money demand is mainly decided by income, interest rate and expected inflation rate. 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
As some variables are able to make negative values, so linear function should be expressed and Equation (1) can be rewritten as, ðM=PÞt 1⁄4 a0 þ a1Yt þ a2It þ a3πte þ a4Bt þ a5Ete þ a6FIEt þ ut where M/P denotes the desired real money balances, M is the nominal money balances, P is the consumer price index, Y is the real income, πe is the expected inflation rate, I is the interest rate, B is the government debt, Ee is the expected exchange rate, FIE is the measure of capital mobility defined as the sum (I*+Ee) of the expected exchange rate (Ee) and the foreign interest rate (I*) and u is the white noise series
Summary
In the standard money demand model, money demand is determined by real income, interest rate and expected inflation rate. Because China has been in market-oriented reform since the late 1970s, China’s money demand has a special problem at this stage. A key point is how to capture the staged characteristic of macro-variables related to money demand. Xiangsheng Dou is a professor in economics at the School of Economics and Management, Southwest Jiaotong University, P. He holds a PhD in economics from Xiamen University, China. He has been interested in international economics, development economics and environmental economics
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