Estimation of Precautionary Demand by Financial Anxieties

Y. Morita (), Md. J. Rahman and S. Miyagawa
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Y. Morita: Department of Economics, Kyoto Gakuen University
Md. J. Rahman: Department of Statistics, Rajshahi University
S. Miyagawa: Department of Economics, Kyoto Gakuen University

No 46, Computing in Economics and Finance 2006 from Society for Computational Economics

Abstract: 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.

Keywords: financial anxieties; precautionary demand; cointegration; EGARCH (search for similar items in EconPapers)
JEL-codes: E42 E52 E58 (search for similar items in EconPapers)
Date: 2006-07-04
New Economics Papers: this item is included in nep-fmk and nep-mac
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