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

Since 1980, the instability of money circulating velocity has led to the instability of money demand in western developed countries, the central bank is facing a big challenge when making the money policies, and the economists founded that one of the most important reasons was lack of considering the factor of the stock market. In China, since Shanghai Stock Exchange and Shenzhen Stock Exchange established in 1990s, China's stock market has developed rapidly, the willingness to invest in the stocks among the citizens and firms grows, which resulted in considerably high values of stocks and large trading volume. Therefore, the incremental demand in money can not be ignored. However, the central bank didn't take into the possible impacts of the stock market on the demand in money when making plan for the money supply. This dissertation intends to analyze the relationships between the stock market and the money demand thoroughly so as to provide useful information and supports for the monetary authorities. This dissertation has 5 chapters.Chapter 1 is an introduction, which mainly introduces the background and the importance of our researches. We also give a brief description of the basic thesis ideas, the method of measurement and the main tasks in this dissertation.Chapter 2 is the theoretical basis of this dissertation and a brief summary of the empirical researches. In this chapter, firstly, we review the classical theories of the money demand, compare these theories simply, and expatiate further development of the theories. After that, we summarize the related research literatures both at home and abroad. Most of the foreign scholars considered there was a negative relationship between the two, while the domestic scholars found a positive relationship mostly, only few found negative. When reading these papers carefully, we found there were some limitations in their econometrics methods or the choosing of variables, which established the basis of improving the variables and making the models in Chapter 4.In Chapter 3, we sum up the influencing mechanisms of the stock market to the gross money demand and the money structure. M. Friedman pointed out that the stock market exerts influences on the money demand by the combined roles of effects of wealth, exchange, asset integration and substitution, the first three will increase money demand, and the last will reduce money demand. The domestic researches found that the stock market volatility, the economic fluctuations, the interest rate and the inflation are the main factors that have an impact on currency liquidity. The stock market has a great impact on money demand structure. When the stock prices rise, currency liquidity will increase.In order to put forward an objective evaluation of the impacts on the gross money demand and money demand structure exerted by China's stock market, this dissertation carries out an empirical analysis in Chapter 4. This part is divided into two parts. We analyze the relationship between the stock market development and the gross money demand in the first part. M1, M2 are chose as the dependent variables and GDP (Gross Domestic Product), NR (Nominal Rate), INF (Inflation), NC (the stock value) as the independent variables. Before further analyses, the data are processed. The model is adopted three common metric methods: the Co-Integration Analysis, the Impulse Response Functions and the Error-Correction Model with the sample of quarterly data from the first quarter of 1994 to the fourth quarter of 2005. After testing the unit root test of each series, the series are all I (1) (integrated of order one), so they can be co-integrated. The results of the co-integration tests reveal that there is a positive relationship not only between the stock market and M1 but also between the stock market and M2 controlling of other factors, which are the same as most of the domestic scholars'. The Error-Correction Model indicates the stock market volatility has a short dynamic weak impact on M1, while the Error-Correction Model for M2 is unsuccessful, we will pay further attention to the problem in future. The Impulse Response Functions find the same conclusions as the above. We also find that the short influence of the stock market on M1 is weaker than the long influence. In the second part, we discuss the influence of the stock market on money demand structure. The dependent variable is M12, and the independent variables are SG (the fluctuating value of the stock market), AGDP (the economic fluctuation), NR (the nominal rate) and INF (inflation), the sample is the same as the above. The series are all I(1), the results show that after dropping AGDP, there is a long-term remarkable co-integration relation between M2 and LSG, LNR, INF. The conclusions are money liquidity gets strengthened along with the rise in the stock prices. However, the influence of NR on M12 is positive, maybe the reasons are inflation, especially the citizens prefer to possess the bank deposit facing the expenditures of medical, education for the young, providing for the aged and the purchasing of the houses which lead to a low liquidity of M12.In Chapter 5, we summarize the empirical conclusions and put forward several policy suggestions. Combined the influential mechanisms of the development of the stock market to the money demand with the empirical results, we find the stock market has a distinct effect on the money demand since 1990s, so several suggestions are given: firstly, the government must improve the operational system of monetary policy, make the asset prices as the ultimate goal of monetary policy into the system; Secondly, the relationships of money market and stock market should be leading to achieve coordinated development; Thirdly, we should develop the stock market regularly and improve the operational efficiency. Along with the further development of the stock market, Chinese monetary policies are facing new challenges, so the central bank should concern not only the money demand of the entity economy, but also the money demand of the stock market, so that it can make plan for the money supply more efficiently and play an important part in China's economic growth.