HOUSEHOLD DEMAND FOR LIQUID ASSETS : MODELS AND EVIDENCE IN CHINA

Abstract

In this study, we address the limitations of past Chinese financial assets demand research through the development of variation of the Almost Ideal Demand(AID) and Translog demand systems for urban household liquid asset holdings. Applying the duality approach in production(Translog model) and consumer(AID) economics, we are able to estimate the degree of substitution, income, own-price and cross-price elasticities between liquid assets, in which we also test the integrability conditions. Results imply that except cash, demand for various financial assets is elastic. Cross-price elasticities and cross-price substitution elasticities are moderately high while income elasticities are large and positive for savings deposits, bonds and lending. Institutional, demographic, price uncertainty and purchasing power factors turn out to be significant variables. Furthermore, the elasticities of substitution among different financial assets are quite diverse and distinctive among different regions. Turning to the choice of functional form, our specification testing results say that the AID system is more suitable for estimating Chinese liquid assets demand.