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Use of Money Supply in the Conduct of Japan's Monetary Policy: Reexamining the Time Series Evidence

  • Ryuzo Miyao

    (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)

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    Japan's money supply and its role in monetary policy have drawn considerable attention especially since the Bank of Japan adopted its "quantitative easing" scheme in March 2001. This paper focuses on the role of money supply as an information variable and reexamines the empirical relationship between money and economic activity with recent data extending through 2003. We show that the linkage between M2+CD and income or prices largely disappeared in the 1990s and explore possible reasons for this breakdown. The evidence suggests that (i) time deposits lost their predictive content for future economic activity in the 1990s, which seems a primary reason for the breakdown in the M2-income relationship, (ii) bank loans also became no longer useful in forecasting subsequent movements in output in the late 1990s, and (iii) there has been a close link between time deposits and bank loans throughout the period examined. We argue that Japan's persistent non-performing loans problem and ongoing efforts by firms and banks to trim excessive and inefficient bank loans may have caused the breakdown in the bank loan-income relationship and accordingly the breakdown in the M2-income relationship by way of time deposits over the last decade.

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    Paper provided by Research Institute for Economics & Business Administration, Kobe University in its series Discussion Paper Series with number 163.

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    Length: 32 pages
    Date of creation: Sep 2004
    Date of revision:
    Handle: RePEc:kob:dpaper:163
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    1. Hideaki Hirata & Kazuo Ueda, 1998. "The Yield Spread as a Predictor of Japanese Recessions," Bank of Japan Working Paper Series Research and Statistics D, Bank of Japan.
    2. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    3. Friedman, Benjamin M & Kuttner, Kenneth N, 1992. "Money, Income, Prices, and Interest Rates," American Economic Review, American Economic Association, vol. 82(3), pages 472-92, June.
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    7. Ryuzo Miyao, 2002. "Liquidity Trap and the Stability of Money Demand: Is Japan Really Trapped at the Zero Bound?," Discussion Paper Series 127, Research Institute for Economics & Business Administration, Kobe University.
    8. 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.
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    13. Yoshihiko Tsukuda & Tatsuyoshi Miyakoshi, 1998. "Granger Causality Between Money and Income for the Japanese Economy in the Presence of a Structural Change," The Japanese Economic Review, Japanese Economic Association, vol. 49(2), pages 191-209, 06.
    14. Ploberger, Werner & Kramer, Walter, 1992. "The CUSUM Test with OLS Residuals," Econometrica, Econometric Society, vol. 60(2), pages 271-85, March.
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