EMPIRICAL STUDY OF MONEY DEMAND FUNCTIONS IN CHINA

Abstract

This thesis examines the existence of the stable long-run money demand functions for currency in circulation, narrow money and broad money in China over the post-reform period of 1986 to 2004. The Johansen cointegration procedure is employed to test for the long-run equilibrium relationships among monetary aggregates, price, real income and some measures of the opportunity cost of holding money balances. Our empirical results indicate that there exists a long-run money demand function for broad money over the sample period. The Granger causality and impulse responses are used to investigate the dynamic relationship of the money demand functions. We estimate the dynamic adjustment mechanism of money demand and detect the important influence of monetary forces on the movement of inflation and output growth in China. Our results suggest that it is valid for the PBC to adopt M2 as its intermediate target.