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Financial Liberalization, the Wealth Effect, and the Demand for Broad Money in Japan

July 1997
Toshitaka Sekine

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This paper examines the demand for broad money in Japan from 1975 to 1994. In spite of the large shocks resulting from financial liberalization and the subsequent "boom and bust" of the "bubble" economy, the paper confirms that a stable money demand function can still be set up by taking proper account of financial liberalization and the wealth effect, and by adopting an adequate econometric strategy. In addition, a super exogeneity test is conducted, and its implication is considered in the context of the monetary transmission mechanism.

Key Words:
Demand for money; Monetary policy; Wealth effect; Cointegration; Error correction; Exogeneity; Japan