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Aggregate vs. disaggregate data analysis-a paradox in the estimation of a money demand function of Japan under the low interest rate policy

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Author Info
Yan Shen
Cheng Hsiao
Hiroshi Fujiki (Institute of Monetary and Economic Studies, Bank of Japan, Tokyo, Japan)

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Abstract

We use Japanese aggregate and disaggregate money demand data to show that conflicting inferences can arise. The aggregate data appears to support the contention that there was no stable money demand function. The disaggregate data shows that there was a stable money demand function. Neither was there any indication of the presence of a liquidity trap. Possible sources of discrepancy are explored and the diametrically opposite results between the aggregate and disaggregate analysis are attributed to the neglected heterogeneity among micro units. We provide necessary and sufficient conditions for the existence of a cointegrating relation among aggregate variables when heterogeneous cointegration relations among micro units exist. We also conduct simulation analysis to show that when such conditions are violated, it is possible to observe stable micro relations, but unit root phenomena among macro variables. Moreover, the prediction of aggregate outcomes, using aggregate data, is less accurate than the prediction based on micro equations, and policy evaluation based on aggregate data ignoring heterogeneity in micro units can be grossly misleading. Copyright © 2005 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/jae.806
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File URL: http://qed.econ.queensu.ca:80/jae/2005-v20.5/
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Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 20 (2005)
Issue (Month): 5 ()
Pages: 579-601
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Handle: RePEc:jae:japmet:v:20:y:2005:i:5:p:579-601

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Hiroshi Fujiki & Cheng Hsiao, 2008. "Aggregate and Household Demand for Money: Evidence from Public Opinion Survey on Household Financial Assets and Liabilities," IMES Discussion Paper Series 08-E-17, Institute for Monetary and Economic Studies, Bank of Japan. [Downloadable!]
  2. Fushang Liu & Kajal Lahiri, 2006. "Modelling multi-period inflation uncertainty using a panel of density forecasts," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(8), pages 1199-1219. [Downloadable!]
  3. Cheng Hsiao, 2005. "Longitudinal Data Analysis," Economic Growth centre Working Paper Series 0510, Nanyang Technolgical University, School of Humanities and Social Sciences, Economic Growth centre. [Downloadable!]
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