Open Economy Money Demand Function

This paper takes a more systematic analysis about China's money demand, from both the theoretical and empirical aspect, and focuses on the impact of the value fluctuation of domestic non-monetary assets (stocks, real estate) and foreign assets, besides the expected exchange rate fluctuation of RMB is also an important factor in an open economy. On the theoretical side, this paper analyzes the mechanism of asset price fluctuation's impact on the micro-economic behavior of owing money. On the empirical side, based on the comparative study of the closed economy and open economy money demand model, this paper constructs a long-term stable money demand function and finds out that all the factors analyzed are significant in the short-term money demand function(ECM). The result is a good guide to the operation of monetary policy. For the policy making authorities, it proposes that they should fully consider the significant effect of domestic non-monetary asset price fluctuations and external factors, and do system adjustment as gradually as possible.This paper is structured as follows:Chapter 1 is an introduction part, which introduces the background, theoretical and practical significance, the structural framework of the paper, and its innovation and deficiencies.Chapter 2 reviews the related literature about the theoretical and empirical study of money demand function in West Countries and China, and makes comment.Chapter 3 analyzes the mechanism of China's money demand, focusing on revealing the impact of the fluctuations of stock, real estate price, yield of foreign assets and the expected exchange rate fluctuation on the micro-economic behavior.Chapters 4 takes empirical research about China's money demand functions both on the closed and open economy, but also compares the characteristics of money demand functions at different levels (M1, M2 and quasi-money).Chapter 5 summarizes the main conclusions of this study, and gives suggestion about the formulation and implementation of China's monetary policy.The novelty of this paper is that through considering a variety of domestic and foreign factors, based on both qualitative and quantitative analysis of the characteristics of money demand in China, it constructs a better money demand model, which is meaningful for policy-making and further study.