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On the comparison of alternative specifications for money demand: The case of extremely low interest rate regimes in Japan

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  • Nakashima, Kiyotaka
  • Saito, Makoto

Abstract

Using Japanese money market data, this paper compares the predictive ability of the log–log specification with infinite elasticity at a zero interest rate and the semilog specification with a one time switch from moderate to relatively high semielasticity at annual interest rates less than 0.5%. We find that the latter specification dominates the former in terms of predictive ability for the extremely low interest rate regime (the period between 1999 and 2006) because under the former the semielasticity is excessively sensitive to slight changes in interest rates. We find that interest rate semielasticity has remained stable at a high level since the mid-1990s.

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  • Nakashima, Kiyotaka & Saito, Makoto, 2012. "On the comparison of alternative specifications for money demand: The case of extremely low interest rate regimes in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 26(3), pages 454-471.
    • Handle: RePEc:eee:jjieco:v:26:y:2012:i:3:p:454-471
    DOI: 10.1016/j.jjie.2012.04.001
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    3. Nakashima, Kiyotaka & Saito, Makoto, 2009. "On Empirical Implications of Highly Interest-Elastic Money Demand : A Note," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 50(1), pages 29-34, June.
    4. Vespignani, Joaquin L. & Ratti, Ronald A., 2016. "Not all international monetary shocks are alike for the Japanese economy," Economic Modelling, Elsevier, vol. 52(PB), pages 822-837.
    5. Miller, Stephen M. & Martins, Luis Filipe & Gupta, Rangan, 2019. "A Time-Varying Approach Of The Us Welfare Cost Of Inflation," Macroeconomic Dynamics, Cambridge University Press, vol. 23(2), pages 775-797, March.
    6. Chen, Hongyi & Siklos, Pierre L., 2022. "Central bank digital currency: A review and some macro-financial implications," Journal of Financial Stability, Elsevier, vol. 60(C).
    7. Tsutomu Watanabe, 2020. "The Welfare Implications of Massive Money Injection: The Japanese Experience from 2013 to 2020," Working Papers on Central Bank Communication 028, University of Tokyo, Graduate School of Economics.
    8. Tsuruga, Takayuki & Wake, Shota, 2019. "Money-financed fiscal stimulus: The effects of implementation lag," Journal of Economic Dynamics and Control, Elsevier, vol. 104(C), pages 132-151.
    9. Tsutomu Watanabe & Tomoyoshi Yabu, 2019. "How Large is the Demand for Money at the ZLB? Evidence from Japan," Working Papers on Central Bank Communication 013, University of Tokyo, Graduate School of Economics.
    10. Fujiki, Hiroshi & Tomura, Hajime, 2017. "Fiscal cost to exit quantitative easing: the case of Japan," Japan and the World Economy, Elsevier, vol. 42(C), pages 1-11.
    11. Hiroshi Fujiki, 2014. "Japanese Money Demand from the Regional Data: An Update and Some Additional Results," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 32, pages 45-102, November.
    12. Saito, Makoto & 齊藤, 誠, 2020. "Long-run mild deflation under fiscal unsustainability in Japan," Discussion Paper Series 703, Institute of Economic Research, Hitotsubashi University.
    13. Hiroshi FUJIKI & Kiyotaka Nakashima, 2019. "Cash Usage Trends in Japan: Evidence Using Aggregate and Household Survey Data," Working Papers e131, Tokyo Center for Economic Research.
    14. César Carrera & Jairo Flores, 2017. "Modelling and forecasting money demand: divide and conquer," Working Papers 91, Peruvian Economic Association.

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    More about this item

    Keywords

    Money demand; Zero interest rate policy; Structural break; Bootstrap; Predictive ability comparison;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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