| First, the background and purpose of the research The development of the stock market and the financial innovation result in the worldwide changes in capital gross and its structure, thus impacting the capital gross and structure by the enterprises and citizens, making changes in their investment, savings and consumption. Therefore, Greenspan, chairman of the Federal Reserve stated, the new challenges America's monetary policy faces in the new period are mainly from the capital market. The Central Bank, in their drafting the monetary policy, should therefore consider the impact of the stock market. The traditional money demand theory did not take the impact of stock market under consideration: Keynes divided assets that are used to be saved into money and bond; Friedman took money as a kind of assets, considering actual money demand is the function of permanent income and opportunity cost of holding money. Later, Friedman revised his theory, and pointed out in 1998 that stock price impacts money demand by four effects: treasure effect, capital portfolio effect, dealing effect and substitute effect. He also used facts to demonstrate this theory. Chinese researchers used foreign theories for reference and did researches on China's money demand. They usually chose the stock market exchange gross,stock market index and stock market value,etc as independent variables, but there're some problems in their data processing and model integration. A relatively valid Money Demand Function was not set up. Second, the structure and main content of this essay Starting with the money demand theory, this essay analyzes the variables impacting money demand, then summarizes the dominating factors in China's money demand, and sets up a Money Demand Function conforming our country's actuality. Money Demand Function is what every Central Bank focuses in shaping their monetary policy. A comparatively precise Money Demand Function is quite significant. After studying the factors impacting China's money demand, this essay builds a balanced and long-term Money Demand Function by cointergrating method, and a dynamic and short-term Money Demand Function by Error Correction Model. After a detailed study on both long-term and short-term Money Demand Function, this essay raises some suggestions for the development of Chinese stock market and the establishment of Chinese monetary policy. This essay analyzes the factors impacting money demand, and demonstrates China's Money Demand Function in four parts and sums up China's Money Demand Function using the Error Correction Model. Part One. Brief introduction of the traditional money demand theory. Classic money amount theory thought that money demand was impacted by gross output, and interest rate had no influence on money demand. Cambridge School believed that besides gross output, the interest rate might have some impact on money demand. Keynes presumed that there're three possible incentives for individuals to possess money: dealing incentive, caution incentive and speculating inventive. He then summarized that actual money demand might be showed by the function of nominal interest rate and net incomes, i.e. Liquidity Preference Function. Friedman considered actual money demand the function of permanent income and opportunity cost of holding money. Friedman only took the market interest rate as an impacting factor for money demand, but did not consider the stock market as a scale variable.Part Two. Review the basic forms of money demand in an effort to build a precise function conforming China's money demand. 1) Introduces the latest research on money demand policy. Some economist felt that it's irrational to artificially divide money demand into dealing, caution and venture demand. You couldn't point out which part in the money amount was for this purpose and which for another in any moment. The amount of each part was not necessarily the actual money demand gross. This intersected way of study would lead to what Marshall called Patchwork Fallacy. Therefore, some econom... |
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