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The Empirical Study on the Stability of China’s Money Demand Function

Author: LiuJiQun
Tutor: LuXinSheng
School: Nanjing University of Finance and Economics
Course: Finance
Keywords: monetary demand function M1 M2 error correction model
CLC: F224
Type: Master's thesis
Year: 2011
Downloads: 70
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Abstract


The stability of the monetary demand function is the important precondition for the selection of the monetary supply volume as the intermediate target of the monetary policy. The research for the stability of the monetary demand function has never been interrupted. However, due to the different view and different methods, the final conclusion also differs. Thereafter, the concerning research for the stability of the monetary demand function could not show consistency, also the debate for the selection of the intermediate target of the monetary policy are in the progress. Since 1996, China has adopted the monetary supply volume as the intermediate target of the monetary policy. However, the actual monetary supply volume always deviate from the anticipated volume during the execution of the monetary policy, so lots of scholars concluded that the monetary demand function of our country is unstable and suggested the other index such as the interest rate, the inflation rate as the intermediate target. On the basis of the monetary demand theory and the past research results for the stability of the monetary demand function, I integrate the theoretical research into the econometrical analysis, adopt the error correction model (ECM) and collect the seasonal data from the first season of 1995 to the fourth season of 2004 to study the stability of monetary demand in China. The analysis results show that both Ml and M2 in China have the long-term cointegration relationship with the economic variables. Thereafter, the monetary supply volume could be treated as the intermediate target in the view of the relationship between the final targets of the monetary policy and the monetary supply volume. Meanwhile it also shows M1 is a proper choice as the intermediate target for the short term.The first part introduces the background, then summarizes the international and domestic research results for the stability of the monetary demand function. The second part mainly introduces connotation of the stability of the monetary demand function and its research meaning and it shows that the stability of the monetary demand function is the stable relationship between the monetary volume and the major economic variables, is the important basis for determing the intermediated target of the monetary policy. The third part on the basis of the previous analysis, the monetary function model has been improved and modified and the econometrical analysis has been made, it concludes that both M1 and M2 in China has the long-term cointegration relationship with the economic variables. Thereafter, the monetary supply volume could be treated as the intermediate target in the view of the relationship between the final targets of the monetary policy and the monetary supply volume. Meanwhile it also shows M1 is better choice than M2 as the intermediate target for the short term. The fourth part summarizes the econometrical analysis and makes some suggestions to improve the efficiency of the monetary policy.

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CLC: > Economic > Economic planning and management > Economic calculation, economic and mathematical methods > Economic and mathematical methods
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