Empirical analysis of money demand in China: A cointegration approach

This dissertation investigates whether stable long-run money demand functions for both narrow money and broad money exist in China over the period 1952 to 2000 and for the post-reform period 1982--2000. To achieve this objective, the Johansen Maximum likelihood procedure (Johansen 1991) and the dynamic OLS procedure (Stock and Watson 1993) are employed to estimate the long-run equilibrium relationships between real money balances and their determinants. The Gregory and Hansen tests (Gregory and Hansen 1996) are applied to examine the possible structural breaks in money demand functions. Our empirical results indicate that for both narrow money demand and broad money, there exist long-run money demand functions over the period 1952--2000. Over the post-reform period 1982--2000, there exists a long-run money demand function for broad money holdings, but not for narrow money holdings. Our estimated results from the Johansen procedure are consistent with those from the dynamic OLS procedure, indicating that our empirical results are robust. It is evident that income elasticites are substantially greater unity for both narrow money holdings and broad money holdings. The Gregory and Hansen tests suggest a structural break in broad money demand function. The structural break occurred in 1966.