TITLE:
Demand for Money in China Based on Most Recent Data
AUTHORS:
Yongqing Wang
KEYWORDS:
Money Demand in China, Real Effective Exchange Rate, Interest Rate, Inflation Rate, ARDL Model, Dynamic OLS (DOLS), Fully Modified OLS (FMOLS)
JOURNAL NAME:
Modern Economy,
Vol.14 No.9,
September
14,
2023
ABSTRACT: China’s banking sector has undergone remarkable changes since its
economic reform in 1978. China eliminated its credit plan in 1998, and the banking
sector was no longer strictly controlled by the government. We revisit China’s
demand for money after the banking sector moved toward being market-based. Structural break tests indicate that 2003Q1 is a
breakpoint. Hence, we estimate money demand in China from 2004Q1 to 2022Q3. For
comparison, we also carry out estimations for data from 1999Q1 to 2022Q3. We
employ three different methods: Autoregressive Distributed Lags (ARDL), Dynamic
Ordinary Least Squares (DOLS), and Fully Modified Ordinary Least Squares
(FMOLS). Our results show that the income elasticity is approximately 1. Both
the interest and inflation rates may reflect part of the opportunity costs of
holding money. The results from both DOLS and FMOLS support the existence of
the currency substitution effect. The Cumulative Sum of Recursive Residuals
(CUSUM) and the cumulative sum of squares of recursive residuals (CUSUMSQ)
stability tests suggest that the demand for money in China is stable in the
long run.