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The equilibrium relationship among money, income, prices, and interest rates: evidence from a threshold cointegration test

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  • Daiki Maki
  • Shin-ichi Kitasaka
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    Abstract

    The long-run equilibrium relationship among money, income, prices, and interest rates in Japan is investigated by the threshold cointegration test, which allows for asymmetric adjustment, introduced by Enders and Siklos (2001). The threshold cointegration approach provides clear evidence of the cointegration relationship characterized by asymmetric adjustment. By allowing for asymmetric adjustment, results are obtained showing the stability of the money demand function, similar to Lucas (1988), who pointed out that the money demand function is stable if unit income elasticity is imposed. In particular, the estimated results show that the adjustment process toward equilibrium is highly persistent above an appropriately estimated threshold, whereas the adjustment process toward equilibrium quickly converges below it. This finding indicates that deviations from equilibrium resulting from increases in money or decreases in income and prices are highly persistent.

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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Economics.

    Volume (Year): 38 (2006)
    Issue (Month): 13 ()
    Pages: 1585-1592

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    Handle: RePEc:taf:applec:v:38:y:2006:i:13:p:1585-1592

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    1. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    2. Haug, Alfred A., 1996. "Tests for cointegration a Monte Carlo comparison," Journal of Econometrics, Elsevier, vol. 71(1-2), pages 89-115.
    3. Enders, Walter & Granger, C. W. J., 1998. "Unit Root Tests and Asymmetric Adjustment with an Example Using the Term Structure of Interest Rates," Staff General Research Papers 1388, Iowa State University, Department of Economics.
    4. Phillips, Peter C B & Ouliaris, S, 1990. "Asymptotic Properties of Residual Based Tests for Cointegration," Econometrica, Econometric Society, vol. 58(1), pages 165-93, January.
    5. Cliff Huang & Chien-Fu Jeff Lin & Jen-Chi Cheng, 2001. "Evidence on nonlinear error correction in money demand: the case of Taiwan," Applied Economics, Taylor & Francis Journals, vol. 33(13), pages 1727-1736.
    6. Ng, S. & Perron, P., 1994. "Unit Root Tests ARMA Models with Data Dependent Methods for the Selection of the Truncation Lag," Cahiers de recherche 9423, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
    7. Enders, Walter & Siklos, Pierre L, 2001. "Cointegration and Threshold Adjustment," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(2), pages 166-76, April.
    8. Kazuo Ueda, 1990. "Financial deregulation and the demand for money in Japan," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 176-205.
    9. Breitung, Jorg, 2002. "Nonparametric tests for unit roots and cointegration," Journal of Econometrics, Elsevier, vol. 108(2), pages 343-363, June.
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    Cited by:
    1. Kumar, Saten & Webber, Don J. & Fargher, Scott, 2010. "Money demand stability: A case study of Nigeria," MPRA Paper 26074, University Library of Munich, Germany.
    2. Kumar, Saten, 2011. "Financial reforms and money demand: Evidence from 20 developing countries," Economic Systems, Elsevier, vol. 35(3), pages 323-334, September.
    3. Daiki Maki, 2013. "Detecting cointegration relationships under nonlinear models: Monte Carlo analysis and some applications," Empirical Economics, Springer, vol. 45(1), pages 605-625, August.
    4. Wei Liao & Sampawende J.-A. Tapsoba, 2014. "China’s Monetary Policy and Interest Rate Liberalization: Lessons from International Experiences," IMF Working Papers 14/75, International Monetary Fund.

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