Measuring substitution in China's monetary-assets demand system
China Economic Review, 2018, vol. 50, issue C, 117-132
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)
JEL-codes: C3 E41 E50 G21 O5 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:chieco:v:50:y:2018:i:c:p:117-132
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