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The myth of China’s monetization

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  • Lei Wang
  • Taihui Zhu

Abstract

This article develops a simple model of M2/GDP based on the money demand function of Milton Friedman. This model proves that M2/GDP is positively related to the expected wealth and negatively related to the opportunity costs of holding money. China’s extremely high monetization ratio as measured by M2/GDP is the result of a decades-long rapid economic growth and a depressed financial system. Fast economic growth leads to high expected wealth. A depressed financial system leads to low opportunity costs of holding money. The combination of those two factors increases money demand and leads to very high M2/GDP. The model is verified indirectly by testing two implied testable hypothesizes. The study of this article raises questions on the accuracy of M2/GDP as a measure of monetization.

Suggested Citation

  • Lei Wang & Taihui Zhu, 2018. "The myth of China’s monetization," Applied Economics Letters, Taylor & Francis Journals, vol. 25(11), pages 772-775, June.
    • Handle: RePEc:taf:apeclt:v:25:y:2018:i:11:p:772-775
    DOI: 10.1080/13504851.2017.1366633
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