Stability of money demand function revisited in China

Abstract

As China's economic reforms have undergone significant structural changes after 1979, it has been rather difficult to formulate a stable money demand function over the period following that year. While previous literature on the long-run relationship of money demand in China shows the existence of stable money demand, this article revisits the stability of the China money demand function over the period after 1979. To employ the unit root tests and the cointegration tests with structural break, the empirical evidence demonstrates that economic and financial deregulation did affect the stability of demand for money in China over the period 1977 to 2002. Moreover, the estimated long-run income and interest elasticity are respectively 1.01 (1.11) and -0.14 (-0.08) using the real M1 (M2) equation. In addition, real income and the interest rate are found to be weakly exogenous. We overall do find structural breakpoints mainly in 1980 and 1993, and they look to match clearly with corresponding critical financial and economic incidents

Explaining money demand in China during the transition from a centrally planned to a market-based monetary system

“…The impact of the coefficients changes over the period, with an obvious overall transition between 1993 and 1997. Lee and Chien (2008) who estimated a standard demand for money detected a structural change in 1993. Our location parameter is therefore consistent with their finding although we show that the reform process lasted four years until 1997.…”

“…Only three papers have investigated non-linear, i.e., non-stable relationships, and then only with limited regard to institutional details. Lee and Chien (2008) tested the presence of structural changes and identified one major structural breakpoint in 1993. The drawback is that China is likely to have followed a smooth economic transition process while their model includes only two regimes.…”

“…Compared to the earlier literature, we, first, use a transition function that allows for a non-linear transition, rather than assuming (and testing for) the existence of one stable money demand function, or allowing for at most two states (Lee and Chien, 2008). Second, we build our work on a rigorous theoretical framework that we develop by examining the institutional details of China's financial transition.…”

Economic and Monetary Uncertainty and the Demand for Money in China

“…More recent studies have focused on the cointegration among the variables of money demand function and stability. Employing cointegration techniques, these studies find that the M2 monetary aggregate is cointegrated with income and certain other determinants of money demand, such as price level, interest rate, and economic activity (Baharumshah, Mohd, and Masih 2009;Bahmani-Oskooee and Wang 2007;Hafer and Kutan 1994;Huang 1994;Huang 2000;Lee and Chien 2008;Qin 1994).…”

Economic Uncertainty and the Demand for Broad Money in South Africa

“…Thus, in order to capture the shocks or volatilities, Atta-Mensah (2004) recommended incorporating economic uncertainty in the estimation of the money demand model. Furthermore, Lee and Chien (2008) analysed the case in China and found that structural breaks in 1980 and 1993 were mainly caused by the economic and financial crisis. Whilst some researchers have focused on the basic model, few studies have attempted to explore the uncertainty model in recent years.…”