Author(s)

Yongqing Wang

Department of Business and Economics, University of Wisconsin-Waukesha, Waukesha, WI, USA.

China has undertaken numerous economic reforms since 1978, including the abolishment of the fixed exchange rate system and adoption of a “managed floating exchange rate” regime in 2005. In the present study, we examined money demand in China by employing quarterly data after China adopted the new exchange rate system (from 2006Q1 to 2016Q1). To consider currency substitution, demand for money that includes exchange rate in addition to income and inflation is estimated. By incorporating the CUSUM and CUSUMSQ tests for stability in conjunction with cointegration analysis, we find M2 is a better measurement of monetary aggregate because it is cointegrated with its determinants and it is also stable. We also find strong evidence of currency substitution for M2.

Money Demand, Currency Substitution, Cointegration, Stability, CUSUM and CUSUMQ

Wang, Y. (2017) Demand for Money in China with Currency Substitution: Evidence from the Recent Data. Modern Economy, 8, 484-493. doi: 10.4236/me.2017.84036.