Money demand in an open economy

This paper considers the specification of the demand for money in Japan in an open economy context. The importance of considering the rates of return on foreign-currency-denominated assets and disaggregating money by currency denomination and the residence of the holder is emphasized. Estimated money demand equations for resident holdings of yen-denominated M1 and M2 are presented. These equations are used to determine the quantitative impact of the 1980 foreign exchange law on portfolio substitution between domestic money and foreign assets. Portfolio shifts in response to changes in economic variables and the foreign exchange law do not seem to have had a significant influence on the demand for money in Japan.