Economic structure and money demand: an analysis based on output composition of the three economic sectors
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| Title | Economic structure and money demand: an analysis based on output composition of the three economic sectors
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| Author | Chen Sichong,Xu Qiyuan and Li Wenxue |
| Organization | Zhongnan University of Economics and Law; Chinese Academy of Social Sciences，CASS |
| Email | csc_win@163.com; sichongchen@znufe.edu.cn； |
| Key Words | output composition; money demand; M2/GDP ratio; three economic sectors |
| Abstract | We propose that the puzzling phenomena of constantly rising M2/GDP ratio in China could be largely attributed to the fact that weighted output instead of aggregate output is a better measure of transactions via money. This study therefore first demonstrates theoretically changes in the composition of aggregate output can impact money demand greatly. And then, after dividing China’s economy into three economic sectors, we empirically investigate how changes in the composition of output could affect money demand by using panel data in provincial level. Our results show that money demand will increase significantly as the ratio of secondary industry or tertiary industry to total output rises up. In particular, the results are more significant both in the economic and statistical sense for the tertiary industry, compared to the secondary industry. Thus, even if aggregate output remains the same, changes in the composition of output can also result in increase of money demand, leading to the rise of M2/GDP ratio. Our results suggest that when setting monetary growth target, in addition to expected economic growth rate and inflation rate, policy makers should also take into consideration of changes in the composition of output, especially during the process of urbanization and tertiary industry development. |
| Serial Number | WP965 |
| Time | 2015-11-24 |
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