DETECTION OF STRUCTURAL BREAKS IN THE MONEY DEMAND FUNCTION IN SEARCH OF THE POSSIBLE EFFECT OF FINANCIAL INNOVATIONS: APPLYING VECM TO THE CASE OF CHINA

  • Payam Mohammad Aliha Universiti Kebangsaan Malaysia, Bangi, MALAYSIA
  • Tamat Sarmidi Universiti Kebangsaan Malaysia, Bangi, MALAYSIA
  • Fathin Faizah Said Universiti Kebangsaan Malaysia, Bangi, MALAYSIA

Abstract

In this paper, we estimated a conventional money demand model with money demand (MD) as dependent variable and gross domestic product GDP, interest rate (IR) as independent variables over the period 1990-2016 in China. We apply Vector Error Correction Model to estimate money demand. Chow breakpoint test is used to test whether financial innovations has impacted the demand for money. Based on the estimates of the VAR system, we conclude that there are no breaking points in money demand which confirms the result of the stability tests (CUSUM and CUSUM of Squares tests) and is in line with the result of Johansen cointegration test meaning that money demand in China during 1990-2016 was stable. It provides us with the evidence that financial innovations did not cause any breaks in the demand for money. As a by-product of this research, we also conclude that the speed of adjustment toward long run equilibrium is 0.0698. There is not long run causality running from GDP and IR to MD meaning that these variables do not have influence on MD in the long-run. There is short run causality running from GDP to MD and there is no short run causality running from IR to MD. In other words, in the short-run, IR does not affect money demand.

References

Bahmani-Oskooee, M. & Chomsisengphet, S. 2002. Stability of M2 Money Demand Function in Industrial Countries. Applied Economics 34(16): 2075-2083.
Bahmani-Oskooee*, M. & Rehman, H. 2005. Stability of the Money Demand Function in Asian Developing Countries. Applied Economics 37(7): 773-792.
Bjørnland, H. C. 2005. A Stable Demand for Money Despite Financial Crisis: The Case of Venezuela. Applied Economics 37(4): 375-385.
Breuer, J. B. & Lippert, A. F. 1996. Breaks in Money Demand. Southern Economic Journal 496-506.
Cheong, C. 2003. Regime Changes and Econometric Modeling of the Demand for Money in Korea. Economic Modelling 20(3): 437-453.
Choi, K. & Jung, C. 2009. Structural Changes and the Us Money Demand Function. Applied Economics 41(10): 1251-1257.
Greene, W. 2003. H.(2003): Econometric Analysis. New Jersey, ua: Prentice Hall 135-145.
Hansen, B. E. 1992. Testing for Parameter Instability in Linear Models. Journal of Policy Modeling 14(4): 517-533.
Karfakis, C. & Opoulos, M. S. 2000. On the Stability of the Long-Run Money Demand in Greece. Applied Economics Letters 7(2): 83-86.
Lee, C.-C. & Chien, M.-S. 2008. Stability of Money Demand Function Revisited in China. Applied Economics 40(24): 3185-3197.
Muscatelli, V. A. & Spinelli, F. 2000. The Long-Run Stability of the Demand for Money: Italy 1861–1996. Journal of Monetary Economics 45(3): 717-739.
Nagayasu, J. 2003. A Re-Examination of the Japanese Money Demand Function and Structural Shifts. Journal of Policy Modeling 25(4): 359-375.
Pradhan, B. K. & Subramanian, A. 2003. On the Stability of Demand for Money in a Developing Economy: Some Empirical Issues. Journal of Development Economics 72(1): 335-351.
Sriram, S. S. 2002. Determinants and Stability of Demand for M2 in Malaysia. Journal of Asian Economics 13(3): 337-356.
Wu, C.-S., Lin, J.-L., Tiao, G. C. & Cho, D. D. 2005. Is Money Demand in Taiwan Stable? Economic Modelling 22(2): 327-346.
Published
2019-06-25
How to Cite
ALIHA, Payam Mohammad; SARMIDI, Tamat; SAID, Fathin Faizah. DETECTION OF STRUCTURAL BREAKS IN THE MONEY DEMAND FUNCTION IN SEARCH OF THE POSSIBLE EFFECT OF FINANCIAL INNOVATIONS: APPLYING VECM TO THE CASE OF CHINA. International Journal of Business and Economy, [S.l.], v. 1, n. 1, p. 1-9, june 2019. ISSN 2682-8359. Available at: <https://myjms.mohe.gov.my/index.php/ijbec/article/view/6713>. Date accessed: 07 feb. 2023.
Section
Articles