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The Demand for Money at the Zero Interest Rate Bound
en
money demand function
cointegration
ero lower bound
near-zero interest rates
welfare cost of in ation
log-log form
semi-log form
interest elasticity of money demand
Watanabe Tsutomu
Yabu Tomoyoshi
This paper estimates a money demand function using US data from 1980 onward, including the period of near-zero interest rates following the global financial crisis. We conduct cointegration tests to show that the substantial increase in the money-income ratio during the period of near-zero interest rates is captured well by the money demand function in log-log form, but not by that in semi-log form. Our result is the opposite of the result obtained by Ireland (2009), who, using data up until 2006, found that the semi-log specification performs better. The difference in the result from Ireland (2009) mainly stems from the difference in the observation period employed: our observation period contains 24 quarters with interest rates below 1 percent, while Ireland's (2009) observation period contains only three quarters. We also compute the welfare cost of in ation based on the estimated money demand function to find that it is very small: the welfare cost of 2 percent in ation is only 0.04 percent of national income, which is of a similar magnitude as the estimate obtained by Ireland (2009) but much smaller than the estimate by Lucas (2000).
Publisher's another name: JSPS Grants-in-Aid for Scientific Research (S) Central Bank Communication Design
Working Papers on Central Bank Communication
002
2018-09
Research Project on Central Bank Communication
http://www.centralbank.e.u-tokyo.ac.jp/en/category/research-data/