Peng Zhou
Traditional money demand function is based on partial equilibrium model, which only focuses on the liquidity market. Though working quite well in practice, the empirical results of these models are not robust due to probable misspecifications and omission of important factors. This paper employs the latest development in general equilibrium model, especially banking approach, as the theoretical methodology. This new approach emphasizes the more and more significant role of banking sector in a developing monetary economy like China. It is shown that this model behaves better in theoretical plausibility and empirical robustness. On the other hand, this paper also uses various advanced time series econometrics as the empirical methodology to improve the power of estimations and statistical tests.
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