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Broad Money Demand and Asset Substitution in China, Ge Wu

Recent changes to China's financial system, in particular ongoing interest rate liberalization, gradual movement toward a more flexible exchange rate regime, and rapid development of capital markets, have changed substantially the environment in which monetary policy operates. In light of these changes, we estimate an error correction model using a General-to-Specific methodology and confirm that a stable broad money demand function exists taking proper account of asset substitution, with an income elasticity of less than unity. Current inflation is found to have a significant negative impact on the real money demand. However, money demand does not appear very sensitive to interest rates, possibly reflecting their partial liberalization. Changes in the exchange rate also do not affect money demand significantly, but expectations of a further renminbi appreciation since 2005 appears to induce more money demand. Stock prices are statistically insignificant despite recent investors' interest in equity markets
Table Of Contents
Contents; I. Introduction; II. Recent Developments; Figures; 1. Actual and Targeted M2 Growth Rate, 1999-2007; 2. Renminbi Nominal Exchange Rate and REER, 1994-2008; 3. Currency Substitution and Expectation of Exchange Rate, 2003-07; 4. Number of Investor Accounts and Listed Securities on the Shanghai Stock Exchange, 1996-2008; III. A Model of Money Demand in China; A. Earlier Studies; 5. Household Holdings of Financial Assets, 2001-07; B. Model Specification; C. Integration and Cointegration Tests; Tables; 1. Unit Root Tests (ADF statistics); 2. Order of Vector Autoregressions
Literary Form
non fiction
1st ed.
Description based upon print version of record
Physical Description
1 online resource (32 p.)
Specific Material Designation
Form Of Item

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