Author(s)

Fangping Peng¹, Kai Zhan^2*, Yujun Lian^3*

¹Business School, Sun Yat-sen University, Guangzhou, China.
²Finance School, Guangdong University of Foreign Studies, Guangzhou, China.
³Lingnan College, Sun Yat-sen University, Guangzhou, China.

This paper examines the Cagan effect in China by using a panel smooth transition approach on the firm-level data. Our results reveal that the demand for money by firms relatively decreases for the high inflation period, because the firm anticipates further price increase that it seeks a substitute for money, supporting the presence of the Cagan effect in firms in China. A policy implication of our finding is that efficiently managing Inflation Expectation is necessary in China in stimulating the economy through expansion of the money supply.

Cagan Hypothesis, Panel Smooth Transition, Money Demand, Firm Level

Peng, F. , Zhan, K. and Lian, Y. (2015) Cagan Effect and the Money Demand by Firms in China: A Nonlinear Panel Smooth Transition Approach. Journal of Mathematical Finance, 5, 153-156. doi: 10.4236/jmf.2015.52014.