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Is there a long run demand for currency in China?

Abstract

The record of Chinese monetary authorities at targeting MO in the late eighties early nineties is rather poor. This paper thus first aims at determining whether the instability of currency demand is responsible for this. By so doing we show, using adequate econometric techniques, that a long-run demand for currency did exist over the 1988–1993 period, with quarterly data.

Most previous studies concluded that the income elasticity of currency demand in China is very high. The second objective of the paper is to test for the robustness of this result. We show that this income elasticity is unity when proper account is taken of institutional variables representative of the transition process.

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Abbreviations

ADF:

Augmented Dickey Fuller

ARCH:

Auto Regressive Conditional Heteroskedasticity

IMF:

International Monetary Fund

LDCs:

Less Developed Countries

M0:

currency

M1:

narrow money

M2:

broad money

PBC:

People's Bank of China

VAR:

Vector Auto Regressive Model

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Comments on an earlier version by my colleagues Christian Bordes and Dominique Lacoue-Labarthe and by an anonymous referee were very useful in improving the present paper. It also benefited from comments by participants at the annual conference of the (UK) Chinese Economic Society in December 1995. However, I remain solely responsible for all remaining errors.

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Girardin, E. Is there a long run demand for currency in China?. Econ Plann 29, 169–184 (1996). https://doi.org/10.1007/BF00683947

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  • DOI: https://doi.org/10.1007/BF00683947

Key words

  • China
  • currency demand
  • econometric estimation
  • monetary policy