 Measuring substitution in China's monetary-assets demand systemMan Jin China Economic Review, 2018, vol. 50, issue C, 117-132 Abstract: This paper examines China's money demand using a Normalized Quadratic function in the search for global flexibility and easing of the degree of freedom. I impose the theoretical regularity conditions in the model that much of the previous literature ignores. I provide the robust estimates of the Morishima elasticities of substitution among currency, demand deposits and time deposits. I find that currency and demand deposits are elastic substitutes in use, while time deposits are inelastic substitutes with the former two. Time deposits are distant from a medium of exchange, and agents treat them as a saving asset, separable from the composite of currency and demand deposits. The results imply that the narrow money M1 is well-defined, while the broad money M2, which assumes perfect substitution of the component assets, is problematic. A monetary aggregate that internalizes the substitution effects should be adopted in China. Keywords: Elasticity of substitution; Monetary aggregate; Normalized quadratic functional form; Regularity condition (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:chieco:v:50:y:2018:i:c:p:117-132 DOI: 10.1016/j.chieco.2018.04.003 Access Statistics for this article China Economic Review is currently edited by B.M. Fleisher, K. X. D. Huang, M.E. Lovely, Y. Wen, X. Zhang and X. Zhu More articles in China Economic Review from Elsevier |
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