TITLE:
Cagan Effect and the Money Demand by Firms in China: A Nonlinear Panel Smooth Transition Approach
AUTHORS:
Fangping Peng, Kai Zhan, Yujun Lian
KEYWORDS:
Cagan Hypothesis, Panel Smooth Transition, Money Demand, Firm Level
JOURNAL NAME:
Journal of Mathematical Finance,
Vol.5 No.2,
May
5,
2015
ABSTRACT: This paper examines the Cagan effect in China by using a panel smooth transition approach on the firm-level data. Our results reveal that the demand for money by firms relatively decreases for the high inflation period, because the firm anticipates further price increase that it seeks a substitute for money, supporting the presence of the Cagan effect in firms in China. A policy implication of our finding is that efficiently managing Inflation Expectation is necessary in China in stimulating the economy through expansion of the money supply.