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Money demand in China and time-varying cointegration

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  • Zuo, Haomiao
  • Park, Sung Y.
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    Abstract

    Many studies analyze the money demand using a (fixed coefficient) cointegrating regression model, which may not be appropriate to deal with the money demand of a transition economy like China. This paper investigates this issue using a time-varying cointegration approach based on the quarterly data from 1996 to 2009. We find some interesting results: (i) the estimates of the income elasticities are between 0.60 and 0.75, which are comparable with the previous studies; (ii) the estimated interest rate elasticity supports the argument that the overall effect of the interest rate on the money holding is weak although there are some mild evidences that it has been strengthened in recent years; (iii) the substitution effect of equity asset dominates the wealth effect, especially, during the bullish market period. Our result is robust to the alternative choices of the scale or opportunity cost variables and shows that omission of the stock prices in the money demand function would possibly yield a misspecification problem.

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    Bibliographic Info

    Article provided by Elsevier in its journal China Economic Review.

    Volume (Year): 22 (2011)
    Issue (Month): 3 (September)
    Pages: 330-343

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    Handle: RePEc:eee:chieco:v:22:y:2011:i:3:p:330-343

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    Web page: http://www.elsevier.com/locate/chieco

    Related research

    Keywords: Money demand Time-varying coefficient Cointegration Canonical cointegration regression Chinese economy;

    References

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    Cited by:
    1. You, Kefei & Sarantis, Nicholas, 2012. "A twelve-area model for the equilibrium Chinese Yuan/US dollar nominal exchange rate," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(1), pages 151-170.
    2. Stephen M. Miller & Luis F. Martins & Rangan Gupta, 2014. "A Time-Varying Approach of the US Welfare Cost of Inflation," Working papers 2014-11, University of Connecticut, Department of Economics.

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