Explaining Money Demand in China During the Transition from a Centrally Planned to a Market-Based Monetary System

62 Pages Posted: 25 Oct 2011

See all articles by Anne Laure Delatte

Anne Laure Delatte

Groupe ESC Rouen; Observatoire Français des Conjonctures Economiques

Julien Fouquau

University of Orleans

Carsten A. Holz

Hong Kong University of Science & Technology (HKUST) - Division of Social Science

Date Written: October 19, 2011

Abstract

We examine the transition process from a centrally planned to a market-based monetary system in China, with the objective of giving a functional form to the transition in money demand. Applying the cointegrating Time-Varying Smooth Transition Regression model proposed by Choi and Saikkonen (2004) on a constructed dataset spanning the period from 1984 to 2010, and using a seasonal unit-root test developed by Hylleberg et al. (1990), our findings invalidate much of the earlier literature. Our examination of disaggregate as well as aggregate money balances yields the following findings; Households have an infinite demand for money at prevailing interest rates; enterprises have gradually gained decision-making authority over their deposits; Money is a complement rather than a substitute to capital and this has become more prominent over the period; the credit plan has ceased to be a significant driver of money holdings after 1997; In the aggregate monetary sphere, the deposit interest rate has gained only a minor role as a monetary instrument, and only since 2000.

Keywords: money demand, cointegrating time-varying smooth transition regression model, seasonal unit-root test, Chinese economy

JEL Classification: E41, O11, P52, P24, C51

Suggested Citation

Delatte, Anne Laure and Fouquau, Julien and Holz, Carsten A., Explaining Money Demand in China During the Transition from a Centrally Planned to a Market-Based Monetary System (October 19, 2011). BOFIT Discussion Paper No. 27/2011, Available at SSRN: https://ssrn.com/abstract=1949078 or http://dx.doi.org/10.2139/ssrn.1949078

Anne Laure Delatte (Contact Author)

Groupe ESC Rouen ( email )

1, rue du Maréchal Juin - BP 188
Mont Saint Aignan Cedex, Normandy 76825
France

Observatoire Français des Conjonctures Economiques ( email )

69 Quai d'Orsay
Paris 75004
France

Julien Fouquau

University of Orleans ( email )

Rue de Blois
B.P. 6739
45067 Orleans Cedex 2, Orleans cedex 2 45067
France

Carsten A. Holz

Hong Kong University of Science & Technology (HKUST) - Division of Social Science ( email )

Division of Social Science
Clear Water Bay
Clear Water Bay, Kowloon
Hong Kong

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