Aggregate vs. disaggregate data analysis—a paradox in the estimation of a money demand function of Japan under the low interest rate policy
Article first published online: 31 MAR 2005
Copyright © 2005 John Wiley & Sons, Ltd.
Journal of Applied Econometrics
Volume 20, Issue 5, pages 579–601, July/August 2005
How to Cite
Hsiao, C., Shen, Y. and Fujiki, H. (2005), Aggregate vs. disaggregate data analysis—a paradox in the estimation of a money demand function of Japan under the low interest rate policy. J. Appl. Econ., 20: 579–601. doi: 10.1002/jae.806
- Issue published online: 27 JUL 2005
- Article first published online: 31 MAR 2005
- Manuscript Revised: 24 FEB 2004
- Manuscript Received: 16 OCT 2003
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 a cointegrating relation 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 phenomena 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. Copyright © 2005 John Wiley & Sons, Ltd.