China's Financial System Reform, The Demand For Money

As the core of monetary theories, the money demand theory is also an important part of the macroeconomy theories. And one country's monetary policy is also based on it. That is why economists and the monetary authorities have a great concern about this issue. Although there are many theoretical researches about money demand, it is still hard to measure the money demand accurately in a real economy, especially for a developing country like China. So studying the money demand problem in China is really meaningful. The economic reforms starting in the 1980s might have led to structural changes in money demand in China. This raises concerns for the study of money demand, which may need to accommodate a structural break. The existence of a stable long-run money demand function is an important assumption of macroeconomic models. Furthermore, the quantitative estimates of money demand function have important policy implications for monetary and fiscal policy prescriptions. However, This is a question that has not been explored so far in the current literature. The current research on the long-run money demand function in China is still limited and the empirical results are controversial. Therefore, the objective of this thesis is to combine the classic money demand theories and the particular premises in China (1978-2003 financial reform) to explore whether a standard long-run money demand function exists and what are the effecting factors. In this thesis will employ advanced econometric methodologies to get a money demand function for China There are four chapters in this thesis. Firstly, we review the overall concepts of money and money demand. Then we highlight the main macroeconomic variables that influence the demand for money in a real economy. Theoretically, a standard money demand function relates money demand to the real economic transactions, the opportunity cost of holding money balances and the institutions determinants. The objective of chapter 2 is to provide a critical review of the classic money demand literatures in the western counties and a brief introduction of current researches in China. Several important questions remain unanswered in the current literature on money demand in China. China has been undergoing dramatic changes in financial structure since 1979 when economic reform started. Existing research focuses on the study of money demand in the pre-reform period. Whether a stable long-run money demand function exists for post economic reform period has not been fully investigated. In particular, there have been drastic changes in money demand and monetary policy in China in the past ten years. Before we explored the money demand function for this period, it is a must to get some ideas about the financial reform (1978-2003) itself, which is the condition of the money demand function. In chapter 3, we present a summary discussion of the overall structure and evolution of the financial system in China during the post-reform period. In particular, we emphasize the important effects that the financial reform have brought to the money demand during the post-reform period. In Chapter 4, we replicate and extend the pioneering study of money demand in China .At first, we focuses on the integration properties of our data. We discuss in detail the data used in our research and provide a graphic presentation. After discussing the statistical concept of unit roots,we use the Augmented Dickey-Fuller test to test the order of integration of our time series variables. Then we use the OLS procedure to determine whether there exists a stationary cointegrating relationship between the demand for money and its determinants. Later, to get a short run function, we employ the origin of general-to-specific modeling approach and reduction theory and the error correction models are established. Based on the previous hard works, we finally get a conclusion.