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The stability of money demand function in Japan: Evidence from rolling cointegration approach

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  • Tang, Chor Foon

Abstract

The main purpose of this study is to re-investigate the stability of Japanese M2 money demand function over the period of 1960:Q1 to 2007:Q2. This study propose to incorporate the rolling regression approach into the bounds testing procedure for cointegration within the autoregressive distributed lag (ARDL) framework to search for the stability of money demand function in Japan. This study, in general, confirms that real M2 money demand and its determinants, real income and interest rates are cointegrated within the entire sample period. In line to that, the CUSUM and CUSUM of Squares tests show that the money demand function is stable over the analysis period. However, the evidence of rolling ARDL cointegration test implies that Japanese M2 money demand is not stable due to a series of changes in the Japanese monetary policy environment. The finding of this study is vital for policymakers in formulating an appropriate macroeconomic policy. Owing to the low power of CUSUM and CUSUM of Squares tests in the presence of lagged dependent variable(s), this study propose to use the rolling cointegration test to re-investigate the stability of money demand function in Japan.

Suggested Citation

  • Tang, Chor Foon, 2007. "The stability of money demand function in Japan: Evidence from rolling cointegration approach," MPRA Paper 19807, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:19807
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    File URL: https://mpra.ub.uni-muenchen.de/19807/1/MPRA_paper_19807.pdf
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    References listed on IDEAS

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    Cited by:

    1. repec:sae:globus:v:18:y:2017:i:4:p:811-824 is not listed on IDEAS
    2. Muhammad Ahad, 2017. "Financial Development and Money Demand Function: Cointegration, Causality and Variance Decomposition Analysis for Pakistan," Global Business Review, International Management Institute, vol. 18(4), pages 811-824, August.

    More about this item

    Keywords

    Money Demand; Rolling Cointegration Test; Japan; Stability;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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