Evidence on Structural Instability in the Japanese Money Demand Function

Abstract

The main purpose of this study is to re-investigate the long-run Japanese M2 money demand function and its stability over the period of 1970:Q1 to 2010:Q4. This study uses the bounds testing approach to cointegration within the autoregressive distributed lag (ARDL) framework to examine the presence of a cointegration relationship. The rolling regression procedure is then incorporated into the ARDL cointegration test to investigate the stability of the cointegrating relationship between money demand and its determinants in Japan. With the full sample, this study confirms that real M2 money demand, real income, real interest rates and real exchange rates are cointegrated. However, the evidence of the rolling ARDL cointegration test implies that the cointegrating relationships are not stable over time, indicating that the Japanese M2 money demand function is also unstable. In line with the rolling ARDL cointegration results, the recursive Chow breakpoint F-test and the Quandt likelihood ratio (QLR) test also suggest the same instability outcome. JEL Classification Codes: C22; E41