Current issues of monetary policy in the U.S. and Japan: Predictability of money demand

This thesis provides additional information about the general properties of the conventional demand for money function with a special focus on the function's predictability.;Most of the literature on the predictability issue of money demand for the last fifteen years has been based on USA data. An important criticism of this literature is that the different hypotheses about the post-1974 behavior of the demand for money in the USA have been tested on the same body of data that suggested these hypotheses in the first place. This thesis uses a new data set (the Japanese data base) and compares the results with those obtained for the USA. This comparison is justified because of the large similarities between the USA and Japanese financial markets.;The main conclusions of this thesis support the general suspicion among policy makers that the assumed stability of the narrowly defined money demand relationship has collapsed. Alternative specifications which attempt to take into consideration institutional changes as well as financial innovations and deregulation are unable to reestablish a predictable demand for money function for an accountable monetary policy.;This thesis suggests that the best substitute for monetary targeting (after the abandoning of M1) is currency, supporting Patinkin's and Fama's idea. The targeting of M2 and M3 can be used more as a complement rather than as a substitute for the targeting of M1, while the targeting of currency is a better substitute because of its transactions dominated nature and the predictability of its demand function.