Does digital finance change the stability of money demand function? Evidence from China

Minghua Zhan, Lijun Wang, Shuwei Zhan and Yao Lu

Journal of Asian Economics, 2023, vol. 88, issue C

Abstract: Understanding the stability of the money demand function is crucial for determining how money impacts inflation and output, and optimizing monetary policy operations. Our study, using China as a case study, examines the potential effects of digital finance on this stability through cointegration technology. We found that digital finance influences the stability of money demand functions differently across monetary aggregates: it leaves M0 unaltered, doesn't influence the unstable M1, but does disrupt the formerly stable M2. We further investigate how two key services of digital finance - payment and asset management - affect the stability of M0, M1, and M2 demand functions. For payment services, our findings suggest the stability impact on the money demand function follows the order of M0 > M1 > M2. In contrast, for asset management services, the impact is ranked inversely. Consistent with recent studies, our data indicates that employing the Divisia index softens the impact of digital finance on the stability of money demand functions. Moreover, it's essential to monitor the pace of reform and understand how the behaviors of unique economic entities impact the money demand function, while concurrently promoting a deeper reform of interest rate liberalization.

Keywords: Digital finance; Money demand function; Stability; Cointegration (search for similar items in EconPapers)
JEL-codes: E4 E6 G2 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1049007823000696
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:asieco:v:88:y:2023:i:c:s1049007823000696

DOI: 10.1016/j.asieco.2023.101649

Access Statistics for this article

Journal of Asian Economics is currently edited by C. Wiemer

More articles in Journal of Asian Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().