The demand for money in China : a non-linear modelling approach

Abstract

In China, during the reform period (from 1978), a cyclical pattern has been identified in growth and inflation, with both exhibiting large variations. Also there have been significant reforms in the conduct of monetary policy. The empirical literature on the demand for money as yet has not explicitly modelled these non-linear features.

Starting from a multi-equation approach, a linear error correction model (ECM) is then estimated and the stability and linearity of this Chinese money demand model is investigated using the smooth transition regression (STR) technique. A non-linear model is developed where behaviour changes, through different dynamics, as inflation moves past a threshold.