Following the study of U.S. regional data by Mulligan and Sala-i-Martin (1992) and the discussion by Fujiki and Mulligan (1996a) of empirical models of the demand for money, the paper uses Japanese prefectural data to estimate the parameters of a money demand function. The cross-sectional estimates of the income elasticity for a counterpart of M2 minus currency are in the range of 1.2-1.4 and appear stable over time. The cross-sectional income elasticities are used to estimate the interest rate elasticity of money demand from the macro time series data, and to assess changes over time in the degree of financial sophistication.
Keywords: Demand for money;Monetary policy
Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.