Estimation of Precautionary Demand by Financial Anxieties
AbstractPioneering work of modelling financial anxieties was given by Kimura et al (1999) as psychological change of people due to financial shocks. Since they regressed financial position (easy or tight) by nonstationary interest rate, their results exhibit high peaks not only in financial crisis period of 1997 and 1998, but also in the bubble economy period of 1987 to 1989, which seems to be a spurious regression. Furthermore, defining financial anxieties as the conditional variance in TARCH model, one of estimated coefficients did not satisfy sign condition. We got rid of these difficulties by introducing a growth rate model, where a change of financial position (toward ''tight'') under a change of interest rate (toward ''fall'') is regarded as financial anxieties. Such anxieties are quantified by conditional variance of EGARCH model and shown to be stationary. Precautionary demand caused by financial anxieties is estimated in VEC model and it is shown that money adjusted by precautionary demand satisfies a long-run equilibrium relationship in the system (adjusted money, real GDP, interest rate) even in the interval 1980q1 to 2003q2.
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Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 46.
Date of creation: 04 Jul 2006
Date of revision:
financial anxieties; precautionary demand; cointegration; EGARCH;
Find related papers by JEL classification:
- E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-07-15 (All new papers)
- NEP-FMK-2006-07-15 (Financial Markets)
- NEP-MAC-2006-07-15 (Macroeconomics)
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