Study On Elasticity Of Chinese Monetary Demand Factors During Economic Fluctuations

With the People’s Bank of China regarding money supply as an intermediate target of monetary policy in1996, clarifying factors of monetary demand and accurately forecasting the function of the monetary demand became the key to implementing monetary policy. In recent years, China’s economic reform is deepening continuously, and opening up process is accelerating gradually. Changes in economic structure and lifestyle make the factors and mechanism of the monetary demand more and more sophisticated. The most obvious phenomenon is, with the expansion of financial markets and innovation of financial derivatives, the asset structure of micro-economic entities such as businesses, residents, and financial institutions have become diversification, which leads to profound changes in the behavior of people’s holding money and portfolio selection. These changes significantly influence the monetary demand. Especially in the post-financial crisis era, it is more valuable to study the factors’elasticity and quantity of monetary demand. Financial innovations make the micro-economic entities’ portfolio behavior more sophisticated, and the factors’ indicators will change during economic fluctuations. Together with people’s exceptional factors, it becomes more difficulty for the monetary authorities to grasp and regulate the monetary demand dynamically. So, it will be practically significant to study the changes of factors’ elasticity and the impact mechanism during economic fluctuations. This study helps the central bank to estimate and invest money correctly, which can promote the development of China’s economic steadily and healthily. But there is few literature on elastic analysis of monetary demand factors during the economic fluctuations.Based on the portfolio behavior of the micro-economic subjects, this paper trys to conduct an elastic analysis of monetary demand factors during the economic fluctuations, in order to provide some reference for accurate forecasts of China’s monetary demand and policy formulation.This paper at first elaborates classical monetary demand theory and monetary demand functions, then choose four monetary demand factors(income, interest rate, stock price and expected inflation rate)according to our conditions. At the same time make a research on the factors’ impact mechanism from the perspective of economic fluctuations. After that, this paper choose dates between1997to2007which is a complete economic cycle, and establish long-term and short-term money demand functions in recession, depression, recovery and prosperity. By studying the variation of each factor’s elasticity, Johansen Cointegration and Vector Error Correction reveal a conclusion as follows:Income elasticity of monetary demand is large; Interest rate elasticity presents the intertemporal smooth, and the substitution effect is significantly enhanced; Stock prices and monetary demand is a negative correlation in recession and recovery, well in depression and prosperity there is positive correlation between them; The expected inflation rate is negatively associated with monetary demand, and in recovery its influence is largest; Income and expected inflation rate play a noticeable role of adjustment. Finally, give some feasible suggestions for the forecast of China’s monetary demand and macro-control in accordance with the empirical results.