Understanding China’s M2/GDP: Based on the Perspective of Financial Innovation in Bank System
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| Title | Understanding China’s M2/GDP: Based on the Perspective of Financial Innovation in Bank System
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| Author | Xu Chaoyang,Hong Chaowei and Li Li |
| Organization | University of International Business and Economics |
| Email | xuvenite@gmail.com |
| Key Words | The Money Demand; M2/GDP; Financial Innovation; Chinese Money Puzzle |
| Abstract | M2/GDP reflects the money demand. A lot of research has indicated that financial innovation in bank system could play a critical role in restraining the money demand and slowing down the growth of M2/GDP. This research constructs M3/M2 to measure the degree of financial innovation in bank system in China and then investigates its effect on China’s money demand by using the “general to specific” methodology. Empirical test shows that there is a significant effect of M3/M2 in restraining the money demand both in the long and short term. If China’s current M3/M2 reached the level of that of U.S. in 2005, then the amount of the money demand would have decreased by 30%. Furthermore, after considering the role of financial innovation, we find that a higher proportion of direct financing have no significant effect on restraining the money demand. Therefore, the rapid increasing M2/GDP in China could be explained by the slowing process of financial innovation in bank system, rather than the lower proportion of direct financing. |
| Serial Number | WP1096 |
| Time | 2016-08-16 |
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