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AN EXTREMELY-LOW-INTEREST-RATE POLICY AND THE SHAPE OF THE JAPANESE MONEY DEMAND FUNCTION

A NONLINEAR COINTEGRATION APPROACH

Published online by Cambridge University Press:  08 October 2009

Kiyotaka Nakashima
Kiyotaka Nakashima*
Affiliation:
Konan University
*
Address correspondence to: Kiyotaka Nakashima, Faculty of Economics, Konan University, 8-9-1, Okamoto, Higashinada-ku, Kobe, Hyogo, Zip 658-8501, Japan; e-mail: [email protected].
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Abstract

This paper explores the shape of the Japanese money demand function in relation to the historical path of the Bank of Japan's policy rate by employing Saikkonen and Choi's [Econometric Theory 20, 301–340 (2004)] cointegrating smooth transition model. The nonlinear model provides a unified econometric framework, not only for pursuing the time profile of interest elasticity, but also to test the linearity of the Japanese money demand function. The test results for the linearity of the Japanese money demand function provide evidence of nonlinearity with a semilog model and linearity with a double-log model. Using a nonlinear semilog model, the analysis also finds that Japanese money demand comprises three regimes and that the interest semielasticity began to increase in the early 1990s when the Bank of Japan set the policy rate below 3%.

Keywords

Money DemandLow-Interest-Rate PolicyNonlinear CointegrationSmooth Transition Model
Type
Articles
Information
Macroeconomic Dynamics , Volume 13 , Issue 5 , November 2009 , pp. 553 - 579
Copyright
Copyright © Cambridge University Press 2009

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