Measurement of Monetary Liquidity in China

In order to measure the monetary liquidity, this paper reviews various definitions of monetary liquidity, and analyzes the advantages and disadvantages of existing monetary liquidity measurement. We find that most indices evaluate liquidity only from the perspective of money supply, ignoring money demand factors. To get more accurate monetary liquidity evaluation, a new monetary liquidity indicator is constructed in this paper, which is based on four variables, namely money supply, the industrial added value, real interest rate and a composite inflation index synthesized by Consumer Price Index and Product Price Index. The Granger Test shows that the new indicator could measure the monetary liquidity more effectively, by taking money demand taken into account.