This paper examines the demand for money in mainland China. Special attention is paid to the model’s specifications and structural stability. The period to be considered is 1952 to 1988.
An appropriate money demand function for mainland China should include independent variables such as national income, the ratio of potential aggregate demand to aggregate supply, the ratio of foreign trade to national income, and the expected rate of inflation.
Three alternatives definitions of money, M0, M2, and M3 are used as measures of the aggregate money supply. The Almon procedure without endpoint constraints is employed in the modelling of the adjustment process so that actual real level of money demand can dynamically adjust to match the desired level. The stability property of the money demand function is investigated by utilizing the Farley-Hinich test.
The empirical results are as follows:
1. The theoretical model fits the Chinese data quite well. The independent variables, national income and openness of the economy, are all statistically significant and have the correct signs.
2. The elasticities of real money demand with respect to real national income are significantly greater than unity.
3. The estimated money demand function (M. and M3) for mainland China is found to be structurally unstable.
