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Accounting for the Decline in the Velocity of Money in the Japanese Economy

Author

Listed:
  • Nao Sudo

    (Deputy Director, Institute for Monetary and Economic Studies (currently Research and Statistics Department), Bank of Japan (E-mail: nao.sudou@boj.or.jp))

Abstract
A notable feature of the Japanese economy following the banking crisis of the late 1990s is the drastic decline in the velocity of money and the consequent decline in the price level. Based on the inventory model of money demand a la Alvarez, Atkeson, and Edmond (2009), we explore how macroeconomic shocks affect the velocity. Households in the model are subject to a multiple-period cash-in-advance constraint in which the portion of the payment in cash, which we call the liquidity requirement, varies according to the credit service supply in the economy. Extracting various shocks underlying the velocity variations from 1990 to 2010, we find that an increase in the liquidity requirement is the key driver of the decline in velocity. Particularly important is the channel stemming from households f expectations about the future liquidity requirement. During the Japanese banking crisis and the global financial crisis, credit service is disrupted and households expect the disruption to last long. Since they demand additional money for a higher liquidity requirement for current and future transactions, the velocity and the price level decrease, even though the growth rate of money stock then exceeds that of consumption.

Suggested Citation

  • Nao Sudo, 2011. "Accounting for the Decline in the Velocity of Money in the Japanese Economy," IMES Discussion Paper Series 11-E-16, Institute for Monetary and Economic Studies, Bank of Japan.
    • Handle: RePEc:ime:imedps:11-e-16
    as

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    File URL: http://www.imes.boj.or.jp/research/papers/english/11-E-16.pdf
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. Kosuke Aoki & Nao Sudo, 2012. "Asset Portfolio Choice of Banks and Inflation Dynamics," Bank of Japan Working Paper Series 12-E-5, Bank of Japan.
    2. Kenji Nishizaki & Toshitaka Sekine & Yoichi Ueno, 2014. "Chronic Deflation in Japan," Asian Economic Policy Review, Japan Center for Economic Research, vol. 9(1), pages 20-39, January.
    3. Svatopluk Kapounek & Jitka Poměnková, 2012. "Liquidity supply and money velocity co-movements in the Eurozone - Time-Frequency Domain Approach," Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, Mendel University Press, vol. 60(2), pages 109-116.
    4. Kosuke Aoki & Nao Sudo, 2013. "Bank’s regulation, asset portfolio choice of banks, and macroeconomic dynamics," CARF F-Series CARF-F-323, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    5. Bamadev Paudel, 2017. "Alleviating Poverty through Job Creation: Quantity Equation of Money may Come into Play," Journal of Development Innovations, KarmaQuest International, vol. 1(1), pages 84-113, February.
    6. repec:kqi:journl:2017-1-5 is not listed on IDEAS

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    More about this item

    Keywords

    Velocity of Money; Liquidity Requirement; Financial Crises;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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