On the comparison of alternative specifications for money demand: The case of extremely low interest rate regimes in Japan

Kiyotaka Nakashima () and Makoto Saito

MPRA Paper from University Library of Munich, Germany

Abstract: Using Japanese money market data, this paper compares the predictive ability of the log-log specification with infinite elasticity at a zero interest rate and the semilog specification with a one time switch from moderate to relatively high semielasticity at annual interest rates less than 0.5%. We find that the latter specification dominates the former in terms of predictive ability for the extremely low interest rate regime (the period between 1999 and 2006) because under the former the semielasticity is excessively sensitive to slight changes in interest rates. We find that interest rate semielasticity has remained stable at a high level since the mid-1990s.

Keywords: money demand; zero interest rate policy; structural break; bootstrap; predictive ability comparison. (search for similar items in EconPapers)
JEL-codes: E31 E41 E52 (search for similar items in EconPapers)
Date: 2012-04-02
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Published in Journal of the Japanese and International Economies 3.26(2012): pp. 454-471

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Journal Article: On the comparison of alternative specifications for money demand: The case of extremely low interest rate regimes in Japan (2012)
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