On the Impact of Policy Uncertainty on the Demand for Money in China: An Asymmetric Analysis

Abstract

Abstract One previous study that estimated the demand for money in China, included output volatility and money supply volatility as two measures of uncertainty. The study found their effects to be transitory in the short-run but not in the long-run. We suspect that the lack of long-run effects could be due to both uncertainty measures being less comprehensive. When we replaced the two measures with a relatively more comprehensive measure known as policy uncertainty, we too found only short-run effects. However, when we separated increased uncertainty from declines and engaged in asymmetric analysis by estimating a nonlinear money demand function, we found that in the long run while increased uncertainty has a significant effect on the demand for money, decreased uncertainty does not. Our findings indicated that in China, as uncertainty increases people prefer to hold more cash.