Searching for the Long-Run Relations between Monetary Aggregates and Other Macroeconomic Variables in Japan: A Vector Error Correction Approach

This paper proposes a vector error correction model of five economic variables in Japan: money, income, general price, land price, and interest rate. Following Johansen's procedure, we find three unique cointegrating vectors, which are accepted by hypothesis testing. From the viewpoint of long-run economic relations, these three vectors are interpreted as equations determining the equilibrium levels of general price, money, and land price respectively. When controlling the effect of land price, the long-run income elasticity of M2+CDs is estimated to be near unity and fairly stable over time. On the other hand, the long-run relation between M2+CDs and the GDP deflator is found not so simple as can be represented by one to one correspondence, although these two variables are to some extent positively linked with each other. Tests for weak exogeneity and application to forecasting are also implemented.