Equilibrium Income and Interest Elasticities of the Demand for M1 in Japan
Robert H. Rasche
This study investigates the equilibrium relationship between real M1 balances, real GNP and short-term interest rates in Japan since 1955. Although each of these variables appears to be nonstationary, the evidence suggests that there exists a stable, stationary linear combination of the three variables over the entire sample period. The estimated coefficients of this vector suggest that the long-run income elasticity of real M1 is not significantly different from one, and the long-run interest elasticity is around 0.5.
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