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Estimating the interest rate semi-elasticity of the demand for money in low interest rate environments
Authors:Kazuyuki Inagaki
Affiliation:Department of Economics, Management and Information Science, Onomichi University, 1600 Hisayamada, Onomichi, Hiroshima 722-8506, Japan
Abstract:We estimate the time profile of the interest rate semi-elasticity of the demand for money that is theoretically derived from a money-in-the-utility-function (MIUF) model. This semi-elasticity increases to infinity as interest rates fall to zero. Therefore, the use of this semi-elasticity has an advantage when examining the highly interest-elastic demand for money in low interest rate environments. Using Japanese and U.S. data, we find that the semi-elasticity increases exponentially in low interest rate environments. For example, the highest value of the semi-elasticity in Japan is observed in 2005, and is approximately 350 times larger than the value in 1990.
Keywords:E41
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