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Estimation of Precautionary Demand by Financial Anxieties

Listed author(s):
  • Y. Morita


    (Department of Economics, Kyoto Gakuen University)

  • Md. J. Rahman

    (Department of Statistics, Rajshahi University)

  • S. Miyagawa

    (Department of Economics, Kyoto Gakuen University)

Registered author(s):

    Pioneering 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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    Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 46.

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    Date of creation: 04 Jul 2006
    Handle: RePEc:sce:scecfa:46
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    1. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
    2. Perron, Pierre & Rodriguez, Gabriel, 2003. "GLS detrending, efficient unit root tests and structural change," Journal of Econometrics, Elsevier, vol. 115(1), pages 1-27, July.
    3. Shigeyoshi Miyagawa & Yoji Morita, 2004. "The Recent Monetary Policy and Money Demand in Japan," Discussion Papers 04-15, University of Copenhagen. Department of Economics.
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