Based on the co-integration test findings, this paper constructs an error correctionmodel (ECM) to evaluate the dynamic adjustment process of money demand in China from 1992 to 2012. The co-integration test suggests that a certain long-run relationship exists among money demand, real income, inflation rate and interest rate. But, the ECM shows that the dynamic adjustment process of money demand maintains unstable. Moreover, with the constant promotion of interest rate liberalization and the improvement of financial markets, the money demand function will become much more unstable than before. Therefore, the short-term money growth rate cannot be predicted precisely, we should adjust the intermediate targets of monetary policy timely to promote the healthy development of China's economy.
Key words
money demand /
ECM /
interest rate elasticity /
income elasticity /
policy suggestions
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