The Effect of Monetary Aggregates on the Stability of Money Demand

In this paper,the author constructs Divisia monetary index for China,and compares it with the traditional simple-sum monetary aggregates by estimating long-term and short-term money demand functions.The results show that the money demand function is much more stable when the Divisia monetary index is used as the dependent variable.According to it,the paper concludes that Divisia index can reflect the changes in liquidity of the broad money more precision,so that the People's Bank of China(PBC) should construct Divisia money index, and include it as an alternative target variable in concluding its monetary policy.