Tang, Chor Foon (2007): The stability of money demand function in Japan: Evidence from rolling cointegration approach.
Download (67Kb) | Preview
The main purpose of this study is to re-investigate the stability of Japanese M2 money demand function over the period of 1960:Q1 to 2007:Q2. This study propose to incorporate the rolling regression approach into the bounds testing procedure for cointegration within the autoregressive distributed lag (ARDL) framework to search for the stability of money demand function in Japan. This study, in general, confirms that real M2 money demand and its determinants, real income and interest rates are cointegrated within the entire sample period. In line to that, the CUSUM and CUSUM of Squares tests show that the money demand function is stable over the analysis period. However, the evidence of rolling ARDL cointegration test implies that Japanese M2 money demand is not stable due to a series of changes in the Japanese monetary policy environment. The finding of this study is vital for policymakers in formulating an appropriate macroeconomic policy. Owing to the low power of CUSUM and CUSUM of Squares tests in the presence of lagged dependent variable(s), this study propose to use the rolling cointegration test to re-investigate the stability of money demand function in Japan.
|Item Type:||MPRA Paper|
|Original Title:||The stability of money demand function in Japan: Evidence from rolling cointegration approach|
|Keywords:||Money Demand; Rolling Cointegration Test; Japan; Stability|
|Subjects:||C - Mathematical and Quantitative Methods > C2 - Single Equation Models; Single Variables > C22 - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E41 - Demand for Money
|Depositing User:||Chor Foon Tang|
|Date Deposited:||11. Jan 2010 02:18|
|Last Modified:||12. Feb 2013 11:44|
Amano, R.A. and Wirjanto, T.S. (2000) On the stability of long-run M2 demand in Japan. Japanese Economic Review, 51(4), pp. 536-543.
Andrews, D.W.K. (1993) Tests for parameters Instability and structural change with unknown change point. Econometrica, 61, pp. 821-856.
Bahmani-Oskooee, M. (2001) How stable is M2 demand function in Japan?. Japan and the World Economy, 13(4), pp. 455-461.
Bahmani-Oskooee, M. and Barry, M.P. (2000) Stability of the demand for money in a unstable country: Russia. Journal of Post Keynesian Economics, 22(4), pp. 619-629.
Bahmani-Oskooee, M. and Bohl, M. (2000) Germany monetary unification and the stability of the German M3 money demand function. Economics Letters, 66(2), pp. 203-208.
Bahmani-Oskooee, M. and Chomsisengphet, S. (2002) Stability of M2 money demand function in industrial countries. Applied Economics, 34, pp. 2075-2083.
Bahmani-Oskooee, M. and Economidou, C. (2005) How stable is the demand for money in Greece?. International Economic Journal, 19, pp. 461-472.
Bahmain-Oskooee, M. and Ng, C.W. (2002) Long-run demand for money in Hong Kong: An application of the ARDL model. International Journal of Business and Economics, 1(2), pp. 147-155.
Bahmani-Oskooee, M. and Shabsigh, G. (1996) The demand for money in Japan: Evidence from cointegration analysis. Japan and the World Economy, 8, pp. 1-10.
Bardsen, G. (1989) Estimation of long run coefficients in error correction models. Oxford Bulletin of Economics and Statistics, 51(2), pp. 345-350.
Campbell, J.Y. and Perron, P. (1991) Pitfalls and opportunities: What macroeconomists should know about unit roots. NBER Macroeconomic Annual, 6, pp. 141-201.
Caporale, G.M. and Gil-Alana, L.A. (2005) Fractional cointegration and aggregate money demand functions. The Manchester School, 73(6), pp. 737-753.
Choong, C.K., Yusop, Z. and Soo, S.C. (2005) Foreign direct investment and economic growth in Malaysia: The role of domestic financial sector. Singapore Economic Review, 50(2), pp. 245-268.
Crowder, W.J. and Phengpis, C. (2007) A re-examination of international inflation convergence over the modern float. Journal of International Financial Markets, Institutions and Money, 17(2), pp. 125-139.
DeJong, D.A., Nankervis, J.C., Savin, N.E. and Whiteman, C.H. (1992) Integration versus trend stationarity in time series. Econometrica, 60, pp. 423-433.
Dekle, R. and Pradhan, M. (1999) Financial liberalization and money demand in ASEAN countries. International Journal of Finance and Economics, 4(3), pp. 205-215.
Engle, R.F. and Granger, C.W.J. (1987) Co-integration and error-correction: Representation, estimation, and testing. Econometrica, 55, pp. 251-276.
Hakkio, C.S. and Rush, M. (1991) Cointegration: How short is the long run?. Journal of International Money and Finance, 10(4), pp. 571-581.
Hamori, S. and Tokihisa, A. (2001) Seasonal cointegration and the money demand function: Some evidence from Japan. Applied Economics Letters, 8, pp. 305-310.
Johansen, S. (1988) Statistical analysis of cointegrating vector. Journal of Economic Dynamics and Control, 12, pp. 231-255.
Johansen, S. and Juselius, K. (1990) Maximum likelihood estimation and inference on cointegration – with application to the demand for money. Oxford Bulletin of Economics and Statistics, 52, pp. 169-210.
Kutan, A.M. and Zhou, S. (2003) Has the link between the spot and forward exchange rates broken down? Evidence from rolling cointegration tests. Open Economies Review, 14, pp. 369-379.
Kwiatkowski, D., Phillips, P.C.B., Schmidt, P. and Shin, Y. (1992) Testing the null of stationarity against the alternative of a unit root: How sure are we that the economic time series have a unit root? Journal of Econometrics, 54, pp. 159-178.
Liew, K.S. (2004) Which lag length selection criteria should we employed?. Economics Bulletin, 3, pp. 1-9.
Lütkepohl, H. (2005) New Introduction to multiple time series analysis. Springer-Verlag, Germany.
MacKinnon, J.G. (1996) Numerical distribution functions for unit root and cointegration tests. Journal of Applied Econometrics, 11, pp. 601-618.
Mah, J. (2000) An empirical examination of the disaggregated import demand of Korea: The case of information technology products. Journal of Asian Economics, 9, pp. 237-244.
Miyao, R. (1996) Does a cointegrating M2 demand relation really exist in Japan?. Journal of the Japanese and International Economies, 10, pp. 169-180.
Moghaddam, M. (1997) Financial innovations and the interest elasticity of money demand: Evidence from an error-correction model. Atlantic Economic Journal, 25(2), pp. 155-163.
Narayan, S. and Narayan, P.K. (2005) A empirical analysis of Fiji’s import demand function. Journal of Economic Studies, 32(2), pp. 158-168.
Narayan, P.K. and Smyth, R. (2006) Higher education, real income and real investment in China: Evidence from Granger causality tests. Education Economics, 14(1), pp. 107-125.
Obben, J. (1998) The demand for money in Brunei. Asian Economic Journal, 12(2), pp. 109-121.
Otto, G. (1994) Diagnostic testing: An application to the demand for M1, in Rao, B.B. (Ed.), Cointegration: For the applied economist, St. Martin’s Press, New York, (Chapter 6).
Pattichis, C.A. (1999) Price and income elasticities of disaggregated import demand: Results from UECMs and an application. Applied Economics, 31, pp. 1061-1071.
Pesaran, M.H., Shin, Y. and Smith, R.J. (2001) Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16, pp. 289-326.
Seo, B. and Harada, K. (2001) The financial crises and the instability of money demand in Japan and Korea, in: Paper presented at the Autumn Meeting if the Japanese Economic Association, Hitotsubashi University, Octorber.
Tang, T.C. (2004) Demand for broad money and expenditure components in Japan: An empirical study. Japan and the World Economy, 16, pp. 487-502.
Tang, C.F. and Lean, H.H. (2007) The stability of Phillips curve in Malaysia. ABERU Discussion Paper, No 39, Monash University, Australia.
Turner, P. (2006) Response surfaces for an F-test for cointegration. Applied Economics Letters, 13, pp. 479-482.
Wagner, J.R. (1981) Some implications of a stable demand for money function. Southern Economic Journal, 48(2), pp. 499-501.