On the Stability of the Japanese Money Demand Function: Estimation Results Using the Error Correction Model

Abstract

Until recently, empirical studies on Japan's money demand function, like those in other countries, often revealed its instability. In this paper, Japan's money demand function is reestimated both with the conventional partial adjustment (PA) model and with the up-and-coming error correction model (ECM). The latter results showed that a quite stable money demand function in fact existed for more than two decades. This finding seems to put some weight on the argument that "missing money" phenomena are largely due to specification errors. Some account on the ECM will be also provided in this paper both in the context of British econometrics and recent developments in time series analysis.