An Empirical Study On The Relationship Between The Development Of China's Stock Market And Money Demand

Currently, with the flourish of China's stock market, the willingness among citizens and firms to invest grows, which resulted in considerably high values of stocks and large amounts of the volumes of stock exchanges. Therefore, the demand in more money arose accordingly. In the mean time, however, the central bank has not taken account of the possible impacts of the stock market on the demand in money when framing the plan of currency supply. In this sense, it becomes advisable to conduct an empirical analysis of the relations between the demand in money and the stock market so as to provide constructive references and supports for the making of monetary policies. Based on a thorough survey on the researches concerned, this dissertation endeavors to come up with a generalization of the mechanism via which the development of the stock market influences the demand in money. Namely, including the direct demand in money, the stock market exerts influences on the money demand by the combined roles of effects of wealth, exchange, asset integration and substitution. Considering the reality of China, this dissertation finds that this mechanism is well applicable to illustrate the effects of the stock market on the demand of currency. In view of the continuous growth of China's stock market, new challenges to the China's monetary policies are being posed which requires the authorities not only to satisfy the need of money by the economic entities but as well to gear to the demand in money of stock market. In this way, favorable monetary policies are expected to be made and China's economy is anticipated to be vigorously propelled. In order to put forward an objective evaluation of the impacts exerted by China's stock market, this dissertation carries out an empirical analysis in Chapter Four, using three test methods. The Co-Integration Analysis reveals a remarkable long-term co-integration relation between the development of the stock market and the demand in money when other concerning factors are under control; The Granger Causality Test shows a one-way causal relation between the two mentioned parameters; and the Error-Correction Model demonstrates that the stock market has already been able to slightly affect the demand in money in a short term. The empirical analysis also illustrates that the influences of the stock market on the demand in money in short term is slighter than in long term.