| Sumario: | The results of a study suggest that Chinese monetary authorities should use the monetary aggregate M2 in setting monetary policy. Economic and financial reforms in China since the late 1970s have increased the importance of savings deposits within the money supply and reduced the importance of currency. Data on currency levels (M0) and currency plus savings deposits (M2) in China over the 1952-88 period were taken from a previous study and from International Financial Statistics data. Cointegration tests show that demand for M0 is not proportional to the price level, whereas M2 demand is proportional to price level changes. This implies that using M2 may produce a more reliable money demand function, with expected variable signs and elasticities, and may provide a better measure of the long-run economic effects of monetary policy actions.
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