The equilibrium relationship among money, income, prices, and interest rates: evidence from a threshold cointegration test

Abstract

The long-run equilibrium relationship among money, income, prices, and interest rates in Japan is investigated by the threshold cointegration test, which allows for asymmetric adjustment, introduced by Enders and Siklos (2001). The threshold cointegration approach provides clear evidence of the cointegration relationship characterized by asymmetric adjustment. By allowing for asymmetric adjustment, results are obtained showing the stability of the money demand function, similar to Lucas (1988), who pointed out that the money demand function is stable if unit income elasticity is imposed. In particular, the estimated results show that the adjustment process toward equilibrium is highly persistent above an appropriately estimated threshold, whereas the adjustment process toward equilibrium quickly converges below it. This finding indicates that deviations from equilibrium resulting from increases in money or decreases in income and prices are highly persistent.

Testing the relationships between shadow economy and unemployment: empirical evidence from linear and nonlinear tests

“…Also, Andrade, Bruneau, and Gregoir (2005) point out that accounting for structural breaks is crucial for the study of integrated multivariate dynamical systems. This presumption is supported by the results obtained by ( Balke and Wohar 1998 ;Ewing, Hammoudeh, and Thompson 2006 ;Maki and Kitasaka 2006 ;Esso 2010 ; Esteve and Tamarit 2012 ; Becker, Osborn, and Yildirim 2012 among others) that provide convincing evidence of the asymmetric adjustment of most macroeconomic variables. Therefore, in this paper, to ascertain the robustness of the long-run results, we apply a two-step empirical framework using recent methods for linear and nonlinear cointegration.…”

Australasian money demand stability: application of structural break tests

“…Lutkepohl and Wolters (1998) analysed the M3 demand relationship for Germany over the 1976-1996 period and corroborates stability when the income elasticity was constraint at unity. Similar results were obtained by Maki and Kitasaka (2006) and Lucas (1988) for Japan and USA, respectively.…”

Money demand stability: A case study of Nigeria

“…Since the 1980s and following countless deregulation and liberalization policies, central banks in many advanced economies switched between instruments of monetary policy by moving away from policies that influence the money supply towards those which influence the bank rate. A large number of developed country case studies show that the demand for money has become unstable due to financial reforms and hence support the targeting of the rate of interest by central banks (see, for instance, McPhail, 1991;Haug, 1999;Maki and Kitasaka, 2006;and Caporale and Gil-Alana, 2005;Haug, 2006).…”