Current Issues in Monetary Policy in the United States and Japan

This study investigates the econometric properties of the demand-for-money function as it affects monetary policy. Particular emphasis is placed throughout on the general properties of conventional and alternative demand-for-money specifications and on the predictability of those specifications over time. The data sets used for the econometric work of this study constitute an important contribution for the empirical demand for money literature. Most of the existing literature on money demand has been based on U.S. data. An important criticism of that literature is that the various hypotheses about post-1974 demand for money in the United States have been tested on the same body of data that originally suggested the hypotheses. Grivoyannis here uses a new data set-the Japanese data base-for the first time, comparing the results with those obtained for the United States. The comparison is justified because of the significant similarities between the U.S. and Japanese monetary sectors. Thus Grivoyannis is able to reliably test proposed explanations for the recent abnormal behavior of U.S. money demand on a different set of data and offer important new insights into the general properties of money demand functions.

Grivoyannis begins by examining conventional short-run demand-for-money specifications, presenting estimation and simulation results from log-level and log-first-difference specifications for both countries. These results are then compared with data-driven best-variable specifications. In Chapter 2, the author separates the demand for real M1 into the demand for currency and the demand for demand deposits in order to determine the main source of the function's instability. Sectorally disaggregated demands for real M1 by money holder are also examined in depth. Alternative specifications, which attempt to take into consideration institutional events as well as financial innovation and deregulation, form the focus of the third chapter. Grivoyannis' conclusions support the general suspicion among policy makers that the assumed stability of the money demand relationship has collapsed. Required reading for scholars of monetary policy, econometrics, and macroeconomics, this study will also be of significant interest to students of international finance and banking.

ELIAS C. GRIVOYANNIS is Assistant Professor of Economics at Seton Hall University School of Business and Adjunct Assistant Professor of Economics at New York University Department of Economics.