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Modeling Money Demand in China: Evidence from Cointegration Analysis

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  • Jiadan Jiang

    (School of Trade and Finance, Wuxi City College of Vocational Technology, No. 12, Qianou Road, Huishan District, Wuxi, Jiangsu Province 214153, P. R. China)

Abstract

When monetary policy is not aimed at clearing the money market by using the nominal interest rate, as in China's case, money demand becomes an important analytical tool. This paper examines China's money demand in the long run with the cointegration analysis. We find that (i) real money balances is a function of real income and interest rate in the long run; (ii) real money balances react positively to changes in real income while negatively to those in interest rate in the long run; (iii) the impact of economic activity on real money demand is large while that of the interest rate is relatively small. Our finding implies that monetary aggregates in China have some useful indicator properties and monetary authorities should watch its movement closely.

Suggested Citation

  • Jiadan Jiang, 2016. "Modeling Money Demand in China: Evidence from Cointegration Analysis," China Economic Policy Review (CEPR), World Scientific Publishing Co. Pte. Ltd., vol. 5(01), pages 1-8, June.
    • Handle: RePEc:wsi:ceprxx:v:05:y:2016:i:01:n:s1793969016500047
    DOI: 10.1142/S1793969016500047
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    References listed on IDEAS

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    1. MacKinnon, James G & Haug, Alfred A & Michelis, Leo, 1999. "Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(5), pages 563-577, Sept.-Oct.
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    4. Gordon de Brouwer & Irene Ng & Robert Subbaraman, 1993. "The Demand for Money in Australia: New Tests on an Old Topic," RBA Research Discussion Papers rdp9314, Reserve Bank of Australia.
    5. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
    6. Mr. Bernard J Laurens & Mr. Rodolfo Maino, 2007. "China: Strengthening Monetary Policy Implementation," IMF Working Papers 2007/014, International Monetary Fund.
    7. Goodhart, Charles, 1989. "The Conduct of Monetary Policy," Economic Journal, Royal Economic Society, vol. 99(396), pages 293-346, June.
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    Cited by:

    1. Chen, Xiaohong & Wohlfarth, Paul & Smith, Ron P., 2021. "China's money demand in a cointegrating vector error correction model," Journal of Asian Economics, Elsevier, vol. 75(C).

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