Global Financial Crisis of 2008, Asymmetric Effects of Exchange Rate Changes, and Stability of the Demand for Money in Japan
DOI:
https://doi.org/10.6000/1929-7092.2016.05.23Keywords:
Nonlinear ARDL Approach, Symmetry versus Asymmetry, Money Demand, JapanAbstract
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.
References
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http://dx.doi.org/10.1016/j.econlet.2007.05.024
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http://dx.doi.org/10.2753/CES1097-1475450602
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Marquez, J. (1987), “Money Demand in Open Economies: A Currency Substitution Model for Venezuela”, Journal of International Money and Finance, Vol. 6, pp. 167-178.
http://dx.doi.org/10.1016/0261-5606(87)90031-3
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http://dx.doi.org/10.1006/jjie.1996.0009
Mohammadi, H., M. Cak, and D. Cak, (2008), “Wagner’s Hypothesis: New Evidence from Turkey using the Bounds Testing Approach”, Journal of Economic Studies, Vol. 35, pp. 94-106.
http://dx.doi.org/10.1108/01443580810844442
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http://dx.doi.org/10.2307/139336
Narayan, P.K., S. Narayan, B.C. Prasad, and A. Prasad, (2007), “Export-led Growth Hypothesis: Evidence from Papua New Guinea and Fiji”, Journal of Economic Studies, Vol. 34, pp. 341-351.
http://dx.doi.org/10.1108/01443580710826380
Payne, J. E., (2008), “Inflation and Inflation Uncertainty: Evidence from the Caribbean Region”, Journal of Economic Studies, Vol. 35, pp. 501-511.
http://dx.doi.org/10.1108/01443580810916523
Pesaran, M. H.’ Y. Shin, and R. J. Smith, (2001), “Bounds Testing Approaches to the Analysis of Level Relationships,” Journal of Applied Econometrics, Vol.16, pp. 289-326.
http://dx.doi.org/10.1002/jae.616
Shin, Y, B. C. Yu, and M. Greenwood-Nimmo (2014) “Modelling Asymmetric Cointegration and Dynamic Multipliers in a Nonlinear ARDL Framework” Festschrift in Honor of Peter Schmidt: Econometric Methods and Applications, eds. by R. Sickels and W. Horrace: Springer, 281-314.
http://dx.doi.org/10.1007/978-1-4899-8008-3_9
Tang, T.C., (2007), “Money Demand Function for Southeast Asian Countries: An Empirical View from Expenditure Components”, Journal of Economic Studies, Vol. 34, pp. 476-496.
http://dx.doi.org/10.1108/01443580710830952
Verheyen, F. (2013), “Interest Rate Pass-Through in the EMU-New Evidence Using Nonlinear ARDL Framework”, Economics Bulletin, Vol. 33, No 1, pp. 729-739.
Wong, K. N. and T. C. Tang, (2008) “The Effects of Exchange Rate Variablity on Malaysia’s Disaggregated Electrical Exports”, Journal of Economic Studies, Vol. 35, pp. 154-169.
http://dx.doi.org/10.1108/01443580810870146
http://dx.doi.org/10.1016/j.econlet.2006.06.002
Arango, Sebastian, and M. Ishaq Nadiri (1981), ""Demand for Money in Open economies,"" Journal of Monetary Economics, Vol. 7, pp. 69-83.
http://dx.doi.org/10.1016/0304-3932(81)90052-0
Bahmani-Oskooee, M. (1996), ""The Black Market Exchange Rate and Demand for Money in Iran"" Journal of Macroeconomics, Vol. 18, pp. 171-176.
http://dx.doi.org/10.1016/S0164-0704(96)80010-3
Bahmani-Oskooee, M. (2001), “How Stable is M2 Money Demand Function in Japan?”, Japan and the World Economy, Vol. 13, pp. 455-461.
http://dx.doi.org/10.1016/S0922-1425(01)00064-0
Bahmani-Oskooee, M. and M. Malixi (1991), ""Exchange Rate Sensitivity of the Demand for Money in LDCs."" Applied Economics, Vol. 23, pp. 1377-1384.
http://dx.doi.org/10.1080/00036849100000060
Bahmani-Oskooee, M. and G. Shabsigh (1996), “The Demand for Money in Japan: Evidence from Cointegration Analysis”, Japan and the World Economy, Vol. 8, pp. 1-10.
http://dx.doi.org/10.1016/0922-1425(95)00002-X
Bahmani-Oskooee, M. and A. Tanku, (2008), “The Black Market Exchange Rate vs. the Official Rate in Testing PPP: Which Rate Fosters the Adjustment Process”, Economics Letters, Vol. 99, pp. 40-43.
http://dx.doi.org/10.1016/j.econlet.2007.05.024
Bahmani-Oskooee, M. and S. Chomsisengphet (2002), “Stability of M2 Money Demand Function in Industrial Countries”, Applied Economics, Vol. 34, pp. 2075-2083.
http://dx.doi.org/10.1080/00036840210128744
Bahmani-Oskooee, M. and S. Bahmani (2015), ''Nonlinear ARDL Approach and the Demand for Money in Iran'', Economics Bulletin, Vol. 35, pp. 381-391.
Bahmani-Oskooee, M., Y. Wang, and D Xi, (2012), “Economic Uncertainty, Monetary Uncertainty and the Demand for Money in China”, The Chinese Economy, Vol. 45, pp. 26-37.
http://dx.doi.org/10.2753/CES1097-1475450602
Banerjee, A., J. Dolado, and R. Mestre (1998), “Error-Correction Mechanism Tests in a Single Equation Framework,” Journal of Time Series Analysis, Vol. 19, pp. 267–85.
http://dx.doi.org/10.1111/1467-9892.00091
Chen, Shyh-Wei and Tzu-Chun Chen, (2012) “Untangling the Non-Linear Causal Nexus between Exchange Rates and Stock Prices: New Evidence from the OECD Countries”, Journl of Economic Studies, Vol. 39, pp. 231-25.
http://dx.doi.org/10.1108/01443581211222671
Cheung, Yin-Wong and K. S. Lai, (1993), “Finite-Sample Sizes of Johansen’s Likelihood Ratio Tests for Cointegration”, Oxford Bulletin of Economics and Statistics, 55 (3), 313-328.
http://dx.doi.org/10.1111/j.1468-0084.1993.mp55003003.x
Civcir, I. (2003), “Money Demand, Financial Liberalization and Currency Substitution in Turkey”, Journal of Economic Studies, Vol. 30, pp. 514-534.
http://dx.doi.org/10.1108/01443580310492817
De Vita, G. and K. S. Kyaw, (2008), “Determinants of Capital Flows to Developing Countries: A Structural VAR Analysis”, Journal of Economic Studies, Vol. 35, pp. 304-322.
http://dx.doi.org/10.1108/01443580810895608
Delatte, Anne-Laure and Antonio Lopez-Villavicencio (2012), “Asymmetry Exchange Rate Pass-Through: Evidence from Major Countries”, Journal of Macroeconomics, Vol. 34, pp. 833-844.
http://dx.doi.org/10.1016/j.jmacro.2012.03.003
Domowitz, I. and I. Elbadawi (1987), “An Error-Correction Approach to Money Demand: The Case of Sudan”, Journal of Development Economics, Vol. 26, pp. 257-275.
http://dx.doi.org/10.1016/0304-3878(87)90029-0
Engle, R. F., and C.W.J. Granger (1987), “Co-Integration and Error Correction: Representation, Estimation, and Testing”, Econometrica, Vol. 55, pp. 251-276.
http://dx.doi.org/10.2307/1913236
Fair, Ray C. (1987), “International Evidence on the Demand for Money”, The Review of Economics and Statistics, Vol. 69, pp. 473-480.
http://dx.doi.org/10.2307/1925535
Hajilee, Massomeh, and Omar M. Al-Nasser, (2014), “Exchange Rate Volatility and Stock Market Development in Emerging Economies”, Journal of Post Keynesian Economics, Vol. 37, pp. 163-180.
http://dx.doi.org/10.2753/PKE0160-3477370110
Halicioglu, F., (2007), “The J-Curve Dynamics of Turkish Bilateral Trade: A Cointegration Approach”, Journal of Economic Studies, Vol. 34, pp. 103-119.
http://dx.doi.org/10.1108/01443580710745362
Harb, N. (2004), “Money Demand Function: A Heterogeneous Panel Application”, Applied Economics Letters, Vol. 11, pp. 551-555.
http://dx.doi.org/10.1080/1350485042000225739
Hoffman, Dennis L., Robert H. Rasche, and Margie A. Tieslau (1995), “The Stability of Long-Run Money Demand in Five Industrial Countries”, Journal of Monetary Economics, Vol. 35, pp. 317-339.
http://dx.doi.org/10.1016/0304-3932(95)01189-U
Johansen, S. (1988), “Statistical Analysis of Cointegration Vectors”, Journal of Economic Dynamics and Control, Vol. 12, pp. 231-254.
http://dx.doi.org/10.1016/0165-1889(88)90041-3
Karfakis, C.I. (1991), “Monetary Policy and the Velocity of Money in Greece: A Cointegration Approach”, Applied Financial Economics, Vol. 1, pp. 123-127.
http://dx.doi.org/10.1080/758518037
Marquez, J. (1987), “Money Demand in Open Economies: A Currency Substitution Model for Venezuela”, Journal of International Money and Finance, Vol. 6, pp. 167-178.
http://dx.doi.org/10.1016/0261-5606(87)90031-3
McNown, R. and M.S. Wallace (1992) ""Cointegration Tests of a Long-Run Relationship between Money Demand and the Effective Exchange Rate"" Journal of International Money and Finance 11, 107-114.
http://dx.doi.org/10.1016/0261-5606(92)90024-R
Miyao, R., (1996) “Does a Cointegrating M2 Demand Relation Really Exist in Japan?, Journal of the Japanese and International Economies, Vol. 10, pp. 169-180.
http://dx.doi.org/10.1006/jjie.1996.0009
Mohammadi, H., M. Cak, and D. Cak, (2008), “Wagner’s Hypothesis: New Evidence from Turkey using the Bounds Testing Approach”, Journal of Economic Studies, Vol. 35, pp. 94-106.
http://dx.doi.org/10.1108/01443580810844442
Mundell, A. Robert (1963), ""Capital Mobility and Stabilization Policy under Fixed and Flexible Exchange Rates,"" Canadian Journal of Economics and Political Science, Vol. 29, pp. 475-485.
http://dx.doi.org/10.2307/139336
Narayan, P.K., S. Narayan, B.C. Prasad, and A. Prasad, (2007), “Export-led Growth Hypothesis: Evidence from Papua New Guinea and Fiji”, Journal of Economic Studies, Vol. 34, pp. 341-351.
http://dx.doi.org/10.1108/01443580710826380
Payne, J. E., (2008), “Inflation and Inflation Uncertainty: Evidence from the Caribbean Region”, Journal of Economic Studies, Vol. 35, pp. 501-511.
http://dx.doi.org/10.1108/01443580810916523
Pesaran, M. H.’ Y. Shin, and R. J. Smith, (2001), “Bounds Testing Approaches to the Analysis of Level Relationships,” Journal of Applied Econometrics, Vol.16, pp. 289-326.
http://dx.doi.org/10.1002/jae.616
Shin, Y, B. C. Yu, and M. Greenwood-Nimmo (2014) “Modelling Asymmetric Cointegration and Dynamic Multipliers in a Nonlinear ARDL Framework” Festschrift in Honor of Peter Schmidt: Econometric Methods and Applications, eds. by R. Sickels and W. Horrace: Springer, 281-314.
http://dx.doi.org/10.1007/978-1-4899-8008-3_9
Tang, T.C., (2007), “Money Demand Function for Southeast Asian Countries: An Empirical View from Expenditure Components”, Journal of Economic Studies, Vol. 34, pp. 476-496.
http://dx.doi.org/10.1108/01443580710830952
Verheyen, F. (2013), “Interest Rate Pass-Through in the EMU-New Evidence Using Nonlinear ARDL Framework”, Economics Bulletin, Vol. 33, No 1, pp. 729-739.
Wong, K. N. and T. C. Tang, (2008) “The Effects of Exchange Rate Variablity on Malaysia’s Disaggregated Electrical Exports”, Journal of Economic Studies, Vol. 35, pp. 154-169.
http://dx.doi.org/10.1108/01443580810870146
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Published
2016-08-17
How to Cite
Bahmani-Oskooee, M., & Baek, J. (2016). Global Financial Crisis of 2008, Asymmetric Effects of Exchange Rate Changes, and Stability of the Demand for Money in Japan. Journal of Reviews on Global Economics, 5, 273–280. https://doi.org/10.6000/1929-7092.2016.05.23
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Special Issue: Trends in Monetary Policy and Future Directions
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