Working Paper: CEPR ID: DP9721
Authors: Annelaure Delatte; Julien Fouquau; Carsten Holz
Abstract: Fundamental changes in institutions during the transition from a centrally planned to a market economy present a formidable challenge to monetary policy decision makers. For the case of China, we examine the institutional changes in the monetary system during the process of transition and develop money demand functions that reflect these institutional changes. We consider seasonal unit roots and estimate long run, equilibrium money demand functions, explicitly taking into consideration the changes in the institutional characteristics of China's financial system. Using a newly compiled dataset that covers an unprecedented long time period of 1984-2010 at the quarterly frequency, we are able to draw conclusions on the transitions in households', firms', and aggregate money demand, on the role of the credit plan and interest rates, on the mechanisms of macroeconomic control during economic transition, and on theoretical questions in the development and money literature.
Keywords: Chinese economy; Cointegration; Complementary hypothesis; Money demand; Seasonal unit root
JEL Codes: C51; E41; O11; P24; P52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Economic transition (P21) | Increase in monetization (O42) |
| Increase in monetization (O42) | Increase in money demand (E41) |
| Economic transition (P21) | Increase in money demand (E41) |
| Economic reforms (E69) | Money and capital as complements (E41) |
| State control (P26) | Household money demand (D12) |
| Economic reforms (E69) | Opportunity costs in money demand (E41) |