Relationship Between Real GDP, CPI and M2 During the Lost Decades and Abenomics Era

Abstract

The lost decades and its solutions, especially Abenomics are famous topics when discussing about Japans economy. This paper mainly focused on the relationship between CPI, M2 and real GDP of Japan in both short and long run using VAR model and cointegration analysis, and find out that: (1) Changes in money issuance and gross output in the short run have a positive effect on the increase in the price index; (2) The increase in monetary issuance and price level does not directly bring about an increase in output, but rather affects the demand and reduces the GDP growth rate; (3) The real GDP performance in the long run shows changes in the same direction as CPI, M2 and the time trend. CPI has a positive effect on disequilibrium, while changes in M2 have the effect of eliminating the disequilibrium.