We use annual Japanese prefecture data on income, population, demand deposits, and saving deposits from 1992 to 1997 to investigate the issue of whether there exists a stable money demand function under the low interest rate policy. The evidence appears to support the contention that there does exist a stable money demand function with long-run income elasticity greater than one for M2 and less than one for M1. Furthermore, we find that Japan’s money demand is sensitive to interest rate changes. However, there is no evidence of the presence of a liquidity trap.
Keywords: Money demand; Interest rate; Panel data; Prefecture data
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.