Global Financial Crisis of 2008, Asymmetric Effects of Exchange Rate Changes, and Stability of the Demand for Money in Japan

Abstract

We wonder if Global Financial Crisis of 2008 affected stability of the demand for money in Japan. In testing this hypothesis we deviate from previous studies which either excluded the exchange rate from money demand function in Japan or have not been able to find any significant relation between the exchange rate and the demand for money. While we address stability of the demand for money, we show that failure to find a cointegrating relation or significant effects could be due to assuming a linear model in which exchange rate changes have symmetric effects. Once we consider a nonlinear ARDL approach of Shin et al.'s (2014), we show that not only variables in the money demand are cointegrated but exchange rate changes have asymmetric effects. In the long run, while appreciation of yen has significantly positive effect on the demand for money in Japan, depreciation does not. We also find a stable money demand which was not affected by 2008 financial crisis.

Asymmetrical effects of real exchange rate on the money demand in Saudi Arabia: A non-linear ARDL approach

“…Most of economic variables are either I(0) or I(1). Therefore, most of studies on MDF using ARDL cointegration test have ignored the unit root analysis [30,10,5,6,8]. Most importantly, this methodology allows us to test the asymmetrical effects of LRER t + and LRER t - on the demand for SAR.…”

“…In the estimation of money demand function, we may find a vast literature available for a single country [10]. Therefore, we may focus on Saudi monetary literature to highlight the contribution of this research.…”

“…Afterwards, a number of studies have applied cointergation tests on the money demand function of Saudi Arabia but ignore the exchange rate as a determinant [12,13,14,15] and some studies hypothesize the symmetrical effect of exchange rate on the money demand [16,17,9,18,19,20]. Both problems of ignoring exchange rate or assuming symmetrical effect of exchange rate may become the reasons for the misspecification and unstable MDF [10,5,6,8]. Consequently, some of the studies have reported the theoretically unexpected results for Saudi MDF.…”

Asymmetric effects of exchange rate changes on the demand for divisia money in Malaysia

“…This also provides an alternative for policymakers for a more stable money demand function for interest rate determination under interest targeting. Furthermore, the effectiveness of monetary policy also depends on the stability of the velocity of money, which is facilitated by a stable money demand (Bahmani-Oskooee & Baek, 2016). Hence, identifying the missing variable to define the demand for money is critical.…”

Revisit of Tunisia’s Money Demand Function: What About Oil Price and Exchange Rate Effects?

“…Using a linear model, these studies do not find significant relation between the demand for money and the exchange rate. However, number of recent works demonstrated empirically that exchange rate changes could have significant asymmetric effects on the demand for money (Bahmani-Oskooee and Bahmani, 2015;Bahmani and Baek, 2016;Bahmani et al, 2019). By using a nonlinear model, we address the same issue asking if exchange rate changes do have significant long-run effects on the demand for money and do such effects are asymmetric or not for the Tunisian case.…”