A Study On The Stability Of China's Money Demand Function

The stability of money demand function means the stability of the relationship between the demand for money and its impact factor (scale variable and opportunity costs variables). It shows that when the function is stable, the money demand elasticity of the impact factors are stable. The relationship of the currency demand with economic variables is not only related to monetary economic theory an essential element. In China, money supply is the intermediate target of monetary policy. The demand for money more directly affect the People's Bank behavior of regulation on money supply, then have an important impact on the development and implementation of monetary policy. Stable money demand function can make the money supply produce the desired impact on economic variables (income, interest rates, price levels, etc.). Conversely, when the money demand function is stable, the People's Bank can make an accurate expectation on the economic changes caused by changes in currency demand, so that the money supply and money demand will keep in balance, and ensure price stability.With the recent acceleration of economic reform and opening up, China's economic and finance integrate into the globalization process, the diversification of financial innovation and financial assets increase the complexity of the decision mechanism for monetary demand. This raises the policy authorities and academics concern on Money Demand and research-related, including the estimation of money demand function, the test for the stability of money demand function, under the economic reform and opening up, the impact of the certainty and uncertainty factors on money demand, and so on. In this paper, based on previous studies, we study the impact of stock market, the expected inflation rate, exchange rates, house prices and the financial crisis on money demand function in different time and find that in different time, the extent and effects different factors on the demand for money are different. Moreover, the different factors for different levels of the currency are not the same. In addition, through the nonlinear tests of money demand function, we found that even if the most influential factors on money demand:the national income also showed a different influence in different economic cycles. Therefore, the Final conclusion is:the central bank should consider the role of various factors that influence money demand in different stages of economic development; to make targeted monetary policy and control prices accuratly and effectively; to regulate internal and external balance, to achieve economic stability and healthy development.Chapter 1, Introduction. Introducing the research background, related literature review, research ideas and methods. Sorting out the domestic and foreign literature studyinging on the impact of factors namely, stock market, the expected rate of inflation, exchange rates, house prices on money demand function, summarizing previous research experience, learning from each other, and gives the research road map and research methods used in the main empirical and model.Chapter 2, the impact of stock market on the stability of money demand function. Firstly, this chapter summarizes the theories about the effect of stock market on the demand for money. Then, out of previous research methods, using July 2001-February 2008 monthly data as the study sample, divides the Chinese stock market into sub-bull (August 2005-2008 in February) and the bear market (July 2001-2005 in July), using cointegration approach to test the impact of stock market on money demand at different stages and use the empirical method to investigate the effect of stock market on the currency structure. The research methods of phases both explain the phenomenon of inconsistent conclusions of previous studies, but also found that the the impact of stock market on money demand is significant in the bull market but in the bear market is not significant, and this difference can not be reflected in the total sample.Chapter 3 Influence of expected inflation rate on the stability of money demand. The chapter firstly gives a theoretical elaboration about effect of people's expected inflation rate on the real economy. Then, by consulting relevant literature, using the quarterly data of 1993-2009 as samples, the chapter establishes a model for effectively forecasting the expected rate of inflation. Finally, the expected inflation rate data gained before is used in the money demand equation to do the empirical research, which divides into deflation (1998-2001) and the inflation (2002-2008), about their demand for money in different stages. Empirical methods are also used to examine the impact on currency structure from expected inflation rate. We found that regardless of inflation or deflation, the expected inflation rate affects the demand for money significantly, but the influence is weak. In addition, in different price changes regions, the residuals of the money demand function showed significant trends in opposite direction, indicating that monetary policy can effectively adjust the price level, and long-term objective of monetary policy remains to maintain price stabilityChapter 4. The impact of housing price on money demand function. We use co-integration method to test the impact of housing price on demand for money, find that in the sample period, housing price affect the broad money through transaction effect and the wealth effect. But this effect is not very strong. In addition, the impact on narrow money was not significant. Through the dynamic distribution lag model and state space model, this paper tested the influence of development of real estate market on local consume in eastern central regions and the western region. Dynamic distribution lag model showed only in the eastern areas, the development of real estate market had significant effect on consumption, and the effect is instant. The time-varying parameters model showed that the eastern region due to appreciation potential, which attracted real estate developer and speculators, therefore, the wealth effect obviously and relatively stable. But the real estate development in central region depended largely by its own economic fundamentals, the wealth effect is not very stable, the western region, the financing channels was single, consumption was affected vulnerably by the macroeconomic policy on the real estate market. Therefore this paper suggested in different regions different policy should be taken so that we can not only effectively stimulate home demand but also can control the price of growth, avoiding producing bubbles.Chapter 5 Influence of exchange rate on the stability of money demand function. China's exchange rate system existed from the early days, after 60 years of development, with the reform and opening up, and construction of a market economy, great changes have taken place in the exchange rate regime. Especially in the July 2005, promulgation of the new exchange reform document marked that the exchange rate regime in China has entered a new stage. This article first sort out the journey of China's exchange rate reform, and then divided in two stages before and after the reform on the exchange rate. The conclusion is confirmed that effect of the exchange rate on the demand for money is not the same at different time. Besides, after the causality test on the impact on different currencies levels from exchange rates, the result is that exchange rate has a strong influence on money demand. This conclusion dovetails nicely with our economic reality.Chapter 6 Based on Engle-Granger two step method, this paper examine whether or not the two international finance crises which happened in the end of 1990s and in the beginning of 21 century respectively, have impact on China's money demand stability. The result is the Asian Finance Crisis did have great impact on it, but the second finance crisis did not have impact significantly. Chapter 7. After that, by application of ESTAR Model, this paper make the nonlinear empirical test for the demand of money in China, the result told that the model showed a significant nonlinear characteristics and the transition variable was one lag of real national income, rather than the inflation rate, the conversion rate was significant, but slow, the slope value of the transfer function was-2.64, the conclusions above was consistent with the economic development in China. Finally, two indicators of RMSE and MAE compared ESTAR model and the traditional linear model of sample forecasting ability, the result was that the ESTAR model is better. This article suggested the characteristics of non-linear should be taken into account when studying the demand for money; the nonlinear model had better statistical properties than traditional linear model.Chapter 8 Research result, policy suggestion and outlook...