Current Issues in Monetary Policy in the United States and Japan: The Predictability of Money Demand

Current Issues in Monetary Policy in the United States and Japan: The Predictability of Money Demand

Current Issues in Monetary Policy in the United States and Japan: The Predictability of Money Demand

Current Issues in Monetary Policy in the United States and Japan: The Predictability of Money Demand

Synopsis

This study investigates the econometric properties of the demand for money function as it affects monetary policy. Particular emphasis is placed throughout on the general properties of conventional and alternative demand for money specifications and on the predictability of that demand over time. The author tests proposed explanations for the recent abnormal behavior of U.S. money demand by using a new data set--the Japanese data base--for the first time, offering important new insights into the general properties of money demand functions.

Excerpt

The purpose of this work is to examine certain hypotheses about the predictability of the narrowly defined demand for money function in Japan and, in addition, to see what light these tests might shed on the United States. Similarities in the performance of empirical money-demand equations for both the United States and Japan raise serious questions about the function's overall predictability. Moreover, they support the general belief among policymakers that the assumed stability of the narrowly defined money demand relationship has collapsed.

STATEMENT OF THE PROBLEM AS REFLECTED IN THE AVAILABLE LITERATURE

Judd and Scadding have summarized most of the relevant literature for the post--1974 instability and unpredictability of the U.S. demand-for-money function. Prior to the mid-1970s, most money-demand experts believed that the demand for money exhibited a stable relationship with a small set of macroeconomic variables. Empirical money-demand equations for the pre-1974 period, though, proved unable to describe accurately the post-1974 period for either country. As a matter of fact, the "missing money" phenomenon common to both countries served to show that conventional money-demand . . .

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