Broad Money Demand and Asset Substitution in China
IMF Working Papers, June 1, 2009
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- Broad Money Demand and Asset Substitution in China
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Bibliographic details
- Authors: Ge Wu
- Published: June 1, 2009
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451872781.001
Background and research question
- Recent changes to China's financial system considered:
- ongoing interest rate liberalization
- gradual movement toward a more flexible exchange rate regime
- rapid development of capital markets
- Research objective: estimate broad money demand in the new environment, taking proper account of asset substitution.
Methodology
- Model: error correction model.
- Estimation approach: General-to-Specific methodology.
Key empirical findings
- A stable broad money demand function exists when asset substitution is taken into account.
- Income elasticity of money demand: less than unity.
- Inflation: current inflation has a significant negative impact on real money demand.
- Interest rates: money demand does not appear very sensitive to interest rates (possibly reflecting their partial liberalization).
- Exchange rate:
- Changes in the exchange rate do not affect money demand significantly.
- Expectations of a further renminbi appreciation since 2005 appear to induce more money demand.
- Asset markets: stock prices are statistically insignificant despite recent investors' interest in equity markets.
Subject classification and keywords
- Subject: Capital markets, Demand for money, Deposit rates, Exchange rate arrangements, Exchange rates
- Keywords: financial system, foreign currency, money demand, WP
Content in this bundle
- Broad Money Demand and Asset Substitution in China; by Ge Wu; IMF Working Paper 09/131, June 1, 2009