Appendix I: Data Definitions
Appendix II: Unrestricted Error Correction Representation for Real Broad Money14
Appendix III: Statistical Properties of the Dynamic Model of Money Demand
Austin, Darran, Bert Ward, and Paul Dalziel, 2007, “The Demand for Money in China 1987–2004: A Non-linear Modeling Approach,” China Economic Review, Vol. 18, pp. 190–204.
Bahmani-Oskooee, Mohsen, and Ghiath Shabsigh, 1996, “The Demand for Money in Japan: Evidence from Cointegration Analysis,” Japan and the World Economy, Vol. 8, pp. 1–10.
China Securities Regulatory Commission, 2008, China Capital Market Development Report 2007. Available via the internet: http://www.csrc.gov.cn
Deng, Shuhui and Bin Liu, 1999, “Modelling and Forecasting the Money Demand in China: Cointegration and Nonlinear Analysis,” Annals of Operations Research, 87, pp. 177–89.
Ericsson, Neil R., and Sunil Sharma, 1996, “Broad Money Demand and Financial Liberalization in Greece,” International Finance Discussion Paper, No. 559, Board of Governors of the Federal Reserve System.
Ericsson, Neil R., and Gordon de Brouwer, 1998, “Modeling Inflation in Australia,” Journal of Business and Economic Statistics, Vol. 14, No. 4 (October), pp. 433–49.
Ericsson, Neil R., and Steven B. Kamin, 2007, “Constructive Data Mining: Modeling Argentine Broad Money Demand,” prepared for a conference in honor of David F. Hendry, Oxford University, England (August).
Feltenstein, Andrew, and Ziba Farhadian-Lorie, 1987, “Fiscal Policy, Monetary Targets, and the Price Level in a Centrally Planned Economy: An Application to the Case of China,” Journal of Money, Credit, and Banking, No. 2, p. 137.
Feltenstein, A., and J. Ha, 1992, “The Link Between Macroeconomic Adjustment and Sectoral Output in Post-reform China,” China Economic Review, No. 2, pp. 109–124.
Hafer, R.W., and A.M. Kutan, 1993, “Further Evidence on Money, Output, and Prices in China,” Journal of Comparative Economics, No. 3, pp. 701–09.
Hafer, R.W., and A.M. Kutan, 1994, “Economic Reforms and Long-Run Money Demand in China: Implications for Monetary Policy,” Southern Economic Journal, Vol. 60, pp. 936–945
Hendry, D. F., and Hans-Martin Krolzig, 2001, Automatic Econometric Model Selection Using PcGets 1.0 (London: Timberlake Consultants Ltd).
Huang, Guobo, 1994, “Money Demand in China in the Reform Period: An Error Correction Model,” Applied Economics, No. 7, pp. 713–19.
Johansen, S., 1991, “Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models,” Econometrica, No. 6, pp. 1551–80.
Johansen, Soren, 1992, “Testing Weak Exogeneity and the Order of Cointegration in U.K. Money Demand Data,” Journal of Policy Modeling, No. 14, pp. 313–34.
Johansen, Soren, and Katarina Juselius, 1990, “Maximum Likelihood Estimation and Inference on Cointegration—with Applications to the Demand for Money,” Oxford Bulletin of Economics and Statistics, No. 2, pp. 169–210.
Judd, John P. and John L. Scadding, 1982, “The Search for a Stable Money Demand Function: A Survey of the Post-1973 Literature,” Journal of Economic Literature, Vol. XX, pp. 993–1023.
Liang, Hong and Eva Yi, 2007, “China: Why Should We Care about M3 Growth?” Asia Economics Flash, (July), Economic Research from the Gao Hua Portal.
Ma, Guonan, 1993, “Macroeconomic Disequilibrium, Structural Changes, and the Household Savings and Money Demand in China,” Journal of Development Economics, No. 1, pp. 115–36.
Organization for Economic Cooperation and Development, 2007, Economic Survey of the Euro Area. Available via the internet: http://www.oecd.org/eco/surveys/
Sriram, Subramanian S., 2001, “A Survey of Recent Empirical Money Demand Studies,” Staff Papers, International Monetary Fund, Vol. 47, No. 3, pp. 334–65.
Taylor, M. P, 1986, “From the General to the Specific: The Demand for M2 in Three,” Empirical Economics, Springer, Vol. 11(4), pp. 243–61.
Yamada, H., 2000, “M2 Demand Relation and Effective Exchange Rate in Japan: A Cointegration Analysis,” Applied Economics Letters, No. 7, pp. 229–32.
People’s Bank of China. The paper was written while I was a special appointee in the IMF’s Asia and Pacific Department. I am grateful to Yi Gang of the People’s Bank of China and Neil R. Ericsson of the Federal Reserve Board for their guidance. I also would especially like to thank David Cowen of the IMF for his comments and encouragement, as well as Li Cui, Tao Sun, Zaijin Zhan, Yi Wu, and Man-Keung Tang, also of the IMF, and Zhiwei Zhang of Hong Kong Monetary Authority, for their suggestions.
However, in 2008, the PBC did not announce an annual target for M2, as it typically does at its annual working conference.
Policy financial bonds are issued by the large state policy banks and traded on the interbank market.
Sources: PBC; and IMF, International Financial Statistics.
In Japan, for example, the instability in money demand appears to be associated with a strong devaluation of foreign assets denominated in yen after the Plaza Accord of 1985 (see Yamada (2000)). If one includes the exchange rate in the model, it is possible to find cointegration between real money, income, interest rate, and exchange rate (see Bahmani-Oskooee and Shabsigh (1996); and Yamada (2000)).
Various capital controls are still in place in China, limiting holdings of nonmonetary foreign assets. Thus, they are excluded here.
The ECM is shown to contain information on both the short- and long-run properties of the money demand model, with disequilibrium as a process of adjustment to the long-run equilibrium. This has been done following the general-to-specific methodology as implemented in the PcGets software (see Hendry and Krolzig (2001)).
PcGets selects a data-congruent model even though the precise formulation of econometric relationship among the variables of interest is not known a priori. Starting from a general model that is data congruent, PcGets eliminates statistically insignificant variables, with diagnostic tests checking the validity of these “reductions” to preserve the data congruency in the final specification.
Regression Specification Error Test.
Assuming Δ(m – p) = Δy = ΔR = Δ2p ≡ 0 in (5); time subscripts are dropped, and the dummy can be ignored.
All empirical results in this paper were obtained using Give Win 2.20, PcGive 10.3, and PcGets 1.02.
Interest earned on savings deposits was taxed at a rate of 20 percent effective November 1, 1999; this rate was decreased to 5 percent effective August 15, 2007.
The dependent variable is Δ(m – p)t. The variable (Sti) is a seasonal dummy, except St0, which is the intercept term.
The “flat bands” up to 1998Q3 show the initialization period.