Analysis Of Money Demand In China And Its Currency Gap Problem

In the past decade, the influencing factors of the money demand were becoming more and more complicated because of the economic globalization and accelerating financial innovation. Nowadays, with the continuous development of Chinese economy, the stock market or real estate market is becoming one of the most important way to invest the assets for the Chinese people. And with the continuous adjustment of the Chinese industrial structure policy, the proportion of the third industry is increasing. Furthermore, the inrush of hot money puts the pressure on the inflation. What kind of factors can have really great influence on Chinese money demand? How are the impacts of them? Significant or stable? Therefore, it is of important significance to in-depth analyze the relevant factors which affect the money demand and to discuss the money demand function whether is line with the actual situation of China. Then in the light of these results, we can estimate the monetary gap. It will be helpful to promote the balance of the money supply and money demand, to make effective monetary policy, and to give impetus to the progress of society.This article constructed the co-integration model of Chinese money demand function, using quarterly economic data from1998to2012. According to the model of money demand function, we also analyzed the dominating factors affecting Chinese money demand and their underlying causes since1998. Then we empirical tested the gap between the money demand and the supply. After that testing, we explained the formation and fluctuations of monetary gap. Finally, we gave some proper suggestions, solutions and strategies aiming at the problems of the monetary gap and monetary policy.The Chapter One was the introduction. It introduced background of the research, related literature review, research ideas and methods. This part summarized previous research experience and learned from other researchers, according to sorting out the domestic and foreign literature studies on the impact of factors. The Chapter Two used the hierarchical recursive system analysis method. First of all, we carded influencing factors of the money demand. Second, we compared and screened the variables which were having much greater impacts on the Chinese money demand. At last, we established the model of the money demand function in line with Chinese characteristics. The Chapter Three analyzed the stability of the model, using the stability test(ADF test) and the co-integration approach, and thus we calculated the monetary gap. Last but not the least, we described what the monetary gap was and how it worked and the effectiveness of the monetary policy. The last Chapter contained the conclusion, policy suggestions and outlook.Finally, we came to the conclusion of this article that:(1) The real GDP, the total loans of financial institution, inflation rate, and financial innovation had significant long-term impact on the money demand. The fit of the money demand equation was good. The regression coefficients of the independent variables were remarkable in the significance test.(2) The monetary stability was more volatile in the short term; However, from the point of view of the long-term dynamics, the fluctuations of the monetary gap value were around0. In the long run, monetary stability was stronger than which was in the short-term. The monetary policy worked effectively.