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

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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.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036840600597709

Affiliations: 1: University of Ryukyus, Faculty of Law and Letters, 1 Senbaru, Nishihara, Okinawa, 903-0213, Japan 2: Doshisha University, Faculty of Economics, Karasuma-Higashi-iru, Imadegawa-dori, Kamigyo-ku, Kyoto 602-8580, Japan

Publication date: July 20, 2006

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