A re-examination of the Japanese money demand function and structural shifts

This paper studies the stability of the Japanese money demand function and concludes that the standard money demand function is instable. The instability of individual data is attributable to a major breakdown of the model from 1992 onward. Thus, contrary to previous studies, we suggest that the poor performance of the model was initiated by the bursting of the bubble and economic recession in the 1990s. Our findings also imply that a simple relationship between broad money, income, and interest rates characterized by the standard model is insufficient for analyzing the effects of current Japanese monetary policy.