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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.

Suggested Citation

  • 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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    Cited by:

    1. Stephen M. Miller & Luis F. Martins & Rangan Gupta, 2014. "A Time-Varying Approach of the US Welfare Cost of Inflation," Working Papers 201419, University of Pretoria, Department of Economics.
    2. repec:eee:japwor:v:42:y:2017:i:c:p:1-11 is not listed on IDEAS
    3. repec:ipg:wpaper:2014-474 is not listed on IDEAS
    4. 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.
    5. Nakashima, Kiyotaka & Saito, Makoto, 2008. "On empirical implications of highly interest-elastic money demand: A Note," MPRA Paper 71825, University Library of Munich, Germany.
    6. 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.
    7. César Carrera & Jairo Flores, 2017. "Modelling and forecasting money demand: divide and conquer," Working Papers 2017-91, Peruvian Economic Association.

    More about this item

    Keywords

    Money demand; Zero interest rate policy; Structural break; Bootstrap; Predictive ability comparison;

    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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