Aggregate vs Disaggregate Data Analysis - a Paradox in the Estimation of a Money Demand Function of Japan Under the Low Interest Rate Policy

41 Pages Posted: 18 Jan 2005

See all articles by Cheng Hsiao

Cheng Hsiao

University of Southern California - Department of Economics; National Taiwan University; National Bureau of Economic Research (NBER)

Yan Shen

University of Southern California - Department of Economics; Peking University - China Center for Economic Research

Hiroshi Fujiki

Chuo University - Faculty of Commerce

Date Written: February 17, 2004

Abstract

We use Japanese aggregate and disaggregate money demand data to show that conflicting inferences can arise. The aggregate data appears to support the contention that there was no stable money demand function. The disaggregate data shows that there was a stable money demand function. Neither was there any indication of the presence of a liquidity trap. Possible sources of discrepancy are explored and the diametrically opposite results between the aggregate and disaggregate analysis are attributed to the neglected heterogeneity among micro units. We provide necessary and sufficient conditions for the existence of cointegrating relations among aggregate variables when heterogeneous cointegration relations among micro units exist. We also conduct simulation analysis to show that when such conditions are violated, it is possible to observe stable micro relations, but unit root phenomenon among macro variables. Moreover, the prediction of aggregate outcomes, using aggregate data is less accurate than the prediction based on micro equations and policy evaluation based on aggregate data ignoring heterogeneity in micro units can be grossly misleading.

Suggested Citation

Hsiao, Cheng and Shen, Yan and Fujiki, Hiroshi, Aggregate vs Disaggregate Data Analysis - a Paradox in the Estimation of a Money Demand Function of Japan Under the Low Interest Rate Policy (February 17, 2004). Available at SSRN: https://ssrn.com/abstract=648704 or http://dx.doi.org/10.2139/ssrn.648704

Cheng Hsiao (Contact Author)

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall, 300
Los Angeles, CA 90089
United States

National Taiwan University

1 Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yan Shen

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall, 300
Los Angeles, CA 90089
United States

Peking University - China Center for Economic Research

No. 38 Xueyuan Road
Haidian District
Beijing, Beijing 100871
China

Hiroshi Fujiki

Chuo University - Faculty of Commerce ( email )

742-1, Higashinakano
Hacihoji
Tokyo, 192-0393
Japan