Demand for money in Japan: Evidence from cointegration analysis

Using Johansen-Juselius cointegration technique we examine the stability of the M1 and M2 real demand for money in Japan using quarterly data over the current floating exchange rate period. With four lags in the estimation procedure, it is shown that for the stability of M2 (but not M1) demand for money it is necessary to include the effective exchange rate of the yen. Although the results were sensitive to the choice of lags, there was evidence of more cointegrating vectors in M2 than M1 when the effective exchange rate was included in the cointegrating space.