Demand for Money in China Based on Most Recent Data
- 1 Department of Social Science and Business, College of General Studies, University of Wisconsin-Milwaukee, Waukesha Campus, Waukesha, WI, USA
Abstract
China’s banking sector has undergone remarkable changes since its economic reform in 1978. China eliminated its credit plan in 1998, and the banking sector was no longer strictly controlled by the government. We revisit China’s demand for money after the banking sector moved toward being market-based. Structural break tests indicate that 2003Q1 is a breakpoint. Hence, we estimate money demand in China from 2004Q1 to 2022Q3. For comparison, we also carry out estimations for data from 1999Q1 to 2022Q3. We employ three different methods: Autoregressive Distributed Lags (ARDL), Dynamic Ordinary Least Squares (DOLS), and Fully Modified Ordinary Least Squares (FMOLS). Our results show that the income elasticity is approximately 1. Both the interest and inflation rates may reflect part of the opportunity costs of holding money. The results from both DOLS and FMOLS support the existence of the currency substitution effect. The Cumulative Sum of Recursive Residuals (CUSUM) and the cumulative sum of squares of recursive residuals (CUSUMSQ) stability tests suggest that the demand for money in China is stable in the long run.
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