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

  • Nakashima, Kiyotaka
  • Saito, Makoto

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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Article provided by Elsevier in its journal Journal of the Japanese and International Economies.

Volume (Year): 26 (2012)
Issue (Month): 3 ()
Pages: 454-471

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Handle: RePEc:eee:jjieco:v:26:y:2012:i:3:p:454-471
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622903

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