Financial Liberalization, the Wealth Effect, and the Demand for Broad Money in Japan

This paper examines the demand for broad money in Japan from 1975 to 1994. In spite of the large shocks resulting from financial liberalization and the subsequent "boom and bust" of the "bubble" economy, the paper confirms that a stage money demand function can still be set up by taking proper account of financial liberalization and the wealth effect, and by adopting an adequate econometric strategy. In addition, a super exogeneity test is conducted, and its implication is considered in the context of the monetary transmission mechanism.