We cross-sectionally estimate the income elasticity of money demand using Japanese prefectural deposit statistics and Japanese prefectural accounts statistics from fiscal 1955 to 2009 based on the structural model of Fujiki and Mulligan (1996a). In doing so, we update the results of Fujiki and Mulligan (1996b) using a similar data set from fiscal 1955 to 1990. Our analyses using the sample period of the 1980s confirm the finding of Fujiki and Mulligan (1996b) that the cross-sectional income elasticities of the sum of demand deposits and interest-bearing deposits, similar to the M2 statistics, range from 1.2 to 1.4. Our analysis using the sample period after fiscal 1990 shows that the cross-sectional income elasticities decrease gradually over time, and reach the value of 0.93 in fiscal 2003. Our analysis using data from fiscal 2004 to 2009 shows that the crosssectional income elasticities take a value from 0.6 to 0.7. These results, taken at face value, suggest that households and firms save the monetary inputs for their production activities over time: the additional demand for money for an additional unit of production activity increased by more than one unit by the 1990s, while it increased by less than one unit after 2000.
Keywords: Demand for money; Income elasticity of money demand
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.