The Research On The Effect Of The Stability Of Money Demand In China

The research on stability of money demand has an enormous significance on the ground of monetary policy, which its intermediate target is the quantity of money. If one country’s money demand is stable, the central bank is able to accurately forecast the need of money by the market, and then effectively implement its monetary policy.In 1994, the People’s Bank of China made the money demand the medium target of monetary policy. After this, although the central bank began a series of revolutions of rate marketization, Chinese deposit rate has still been limited. China executed the policy of quantity, which means money demand is still important for the effectiveness of Chinese money policy. Stable money demand helps money policy realize its maintaining goals. If the money demand is not stable, it increases the difficulty to foresee the money demand and conduct the money policy. Therefore the effectiveness of the money policy will be destroyed. In order to observe the stability of Chinese money policy, this paper constructed a RBC model consisting of producers, consumers and banks, and supposed that the body has two ways--cash and credit card, respectively corresponding to two forms of wealth:cash and deposit. Then we solved the equilibrium and found that the nominal interest rate will influence how many times does the economic man go to banks during one period, which can affect the ratio of M1 to GDP. So if the money demand is stable, we can observe a stable negative relationship between M1/GDP and nominal interest rate i. In the next part, we calibrated the model, using the data from 1994 to 2014, and gave out two key conclusion of this paper. First we pointed out that the money demand in China was stable during the first 15th years. On the contrary, since the 2008 this stable relation between money demand and interest rate has been broken. With the decline of China’s nominal interest rate, we didn’t observe the expected increase of money demand. So we concluded that China’s money demand wasn’t stable during such period.Based on the numerical analysis, we then analyzed the incompleteness of China’s financial market and real estate market were two of the most important reasons owing to the destruction of the stability. In addition, the lag of social security system which leading to the increase of precautionary saving, and banks’ credit constrain towards small and medium-sized enterprises maybe other factors than can explain the vanished relation.In the last part, this paper gave some policy suggestions in respect of the factors discussed above. Firstly, we held the idea that the government should promote the development of China’s stock market and encourage financial innovations, which could surely provide more and more investment opportunities for investors. Second, the government should begin to levy the housing tax in order to release those vacant apartments, which will alleviate the degree of distortion between money demand and nominal interest rate. Finally, the government should impetus the construction of China’s social security system as soon as possible, and support small and medium financial institutions which are specialized in loans to small and medium enterprises.