Modeling on the Factors Influencing Currency Demand in China

Analysis of currency demand is an important part in the process of establishing monetary policy.It is the foundation of an accurate monetary policy.Firstly, this paper introduces the factors which influence the demand for currency, followed by the discussion of the choice of variables on the demand for currency.Secondly, there will be the process of managing and analyzing the main factors which have effects on the currency demand on the basis of every quarter's data from 2001 to 2009.The currency demand econometric model, which contains the income, interest rate, expected rate of inflation, stock market capitalization and other important economic indicators as the explanatory variable, has been established at the same time.The results of the analysis reveal that:all of the selected explanatory variables have effects on the demand for currency, the role of these variables together determine the balanced level of narrow currency M1.Among them, there are some factors, which are income, interest rate and inflation, have positive relation with demand for money.However, the relation between the stock market and currency demand is negative.Meanwhile, the paper provides the analysis combining the results of modeling and the circumstance of China.