TITLE:
Demand for Money in China with Currency Substitution: Evidence from the Recent Data
AUTHORS:
Yongqing Wang
KEYWORDS:
Money Demand, Currency Substitution, Cointegration, Stability, CUSUM and CUSUMQ
JOURNAL NAME:
Modern Economy,
Vol.8 No.4,
April
7,
2017
ABSTRACT: China has undertaken numerous economic reforms since
1978, including the abolishment of the fixed exchange rate system and adoption
of a “managed floating exchange rate” regime in 2005. In the present study, we
examined money demand in China by employing quarterly
data after China adopted the new exchange rate system (from 2006Q1 to
2016Q1). To consider currency substitution,
demand for money that includes exchange rate in addition to income and
inflation is estimated. By incorporating the CUSUM and CUSUMSQ tests for
stability in conjunction with cointegration analysis, we find M2 is a better
measurement of monetary aggregate because it is cointegrated with its
determinants and it is also stable. We also find strong evidence of currency
substitution for M2.