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An Extremely Low Interest Rate Policy and the Shape of the Japanese Money Demand Function: A Nonlinear Cointegration Approach

Kiyotaka Nakashima ()

MPRA Paper from University Library of Munich, Germany

Abstract: This paper explores the shape of the Japanese money demand function in relation to the historical path of the Bank of Japan's policy rate by employing Saikkonen and Choi's (2004) cointegrating smooth transition model. The nonlinear model provides a unified econometric framework, not only for pursuing the time profile of interest elasticity, but also to test the linearity of the Japanese money demand function. The test results for the linearity of the Japanese money demand function provide evidence of nonlinearity with a semi-log model and linearity with a double-log model. Using a nonlinear semi-log model, the analysis also finds that Japanese money demand comprises three regimes and that the interest semi-elasticity began to increase in the early 1990s when the Bank of Japan set the policy rate below 3%.

Keywords: Money Demand; Low-Interest-Rate Policy; Nonlinear Cointegration; Smooth Transition Model (search for similar items in EconPapers)
JEL-codes: E4 E41 E5 E52 (search for similar items in EconPapers)
Date: 2008-08-04
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Published in Macroeconomic Dynamics 5.13(2009): pp. 553-579

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