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Cagan Effect and the Money Demand by Firms in China: A Nonlinear Panel Smooth Transition Approach
Business School, Sun Yat-sen University, Guangzhou, China
Finance School, Guangdong University of Foreign Studies, Guangzhou, China
Lingnan College, Sun Yat-sen University, Guangzhou, China
- 1 Business School, Sun Yat-sen University, Guangzhou, China
- 2 Finance School, Guangdong University of Foreign Studies, Guangzhou, China
- 3 Lingnan College, Sun Yat-sen University, Guangzhou, China
Journal of Mathematical Finance·Volume 05 (2015)·Pages 153–156·Published 30 March 2015·DOI10.4236/jmf.2015.52014
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Abstract
This paper examines the Cagan effect in China by using a panel smooth transition approach on the firm-level data. Our results reveal that the demand for money by firms relatively decreases for the high inflation period, because the firm anticipates further price increase that it seeks a substitute for money, supporting the presence of the Cagan effect in firms in China. A policy implication of our finding is that efficiently managing Inflation Expectation is necessary in China in stimulating the economy through expansion of the money supply.
KeywordsCagan HypothesisPanel Smooth TransitionMoney DemandFirm Level
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