Abstract
In both theoretical and empirical fields of economics, demand for money has been received much attention in the past. In Japan, deflation has been prevailed more than 20 years, and there is some possibility that the Bank of Japan’s monetary easing policy, which expands money to markets by buying government bonds, has had a significant influence apart from traditional factors. Also, exchange rates for Japanese currency have fluctuated greatly recently because of the introduction of unprecedented monetary policy in the 2010s that may have affected macroeconomic variables and the money demand function in Japan. Using Japanese experience with deflation over last two decades, I provide strong evidence that recent demand for money is affected by real GDP, exchange rates, and economic volatility; however, interest rates and consumer prices have not impacted demand for money. The results also show that introduction of the drastic quantitative easing policy changed the demand function for money.
Highlights
Demand for money has been discussed continuously and a great deal in the literature both in the theoretical and empirical fields of economics
The Japanese central bank, Bank of Japan (BOJ), bought a huge number of Japanese government bonds as part of its monetary policy, and there has been a strong demand for Japanese government bonds because of low interest rates and because of typical safe assets, so there is some possibility that the money demand function has changed dramatically such that it differs from the traditional money demand function
This study examines basically traditional demand for money function in Japan; (1) exchange rate and (2) economic uncertainty are considered in the estimations
Summary
Demand for money has been discussed continuously and a great deal in the literature both in the theoretical and empirical fields of economics. Arango and Nadiri (1981) showed that exchange rate depreciation has a positive impact on the demand for money as the domestic currency value of foreign assets, which leads to an increase in the wealth of the country and an increase in the demand for real cash balances. The recent Japanese economic and financial condition (i.e., drastic monetary policy and almost zero interest rate) may have greatly changed the demand function for money. This situation has not been considered, though it seems very important for the business world and for policymakers.
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