Cointegration, real exchange rate and modelling the demand for broad money in Japan

Abstract

The literature on the demand for the Japan's broad money addresses two controversial issues: the form (log level or log difference) in which variables enter the money demand function and the question of whether financial innovation and deregulation caused shift(s) in the money demand relationship. Log-level specifications of the money demand function have been shown to exhibit large shifts, whereas log-first-differences and error-correction specifications do not. Our paper demonstrates that the appropriate specification for the Japanese money demand function is that which uses cointegration and error-correction procedures.

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