Monetary policy uncertainties and demand for money for Japan: Nonlinear ARDL approach

According to the Uncertainty Avoidance Index (UAI), the Japanese are one of the highest uncertainty avoidance people. This study examines the potential asymmetric impacts of increases and decreases in monetary policy uncertainties on the demand for money for Japan. To this aim, the newly created Monetary Policy Uncertainty (MPU) index is used (for the first time) and both linear and nonlinear autoregressive distributed lag (ARDL) models are applied for this country between 2000M11-2018M8. The empirical findings indicate that while the linear model does not detect any impact of uncertainties in monetary policy on the demand for money, the nonlinear model detects significant impacts on it. The Japanese demand more money when the uncertainties in monetary policy (MPU) fall and they demand less money when the MPU rises. Therefore, rising uncertainties in monetary policy keep the Japanese away from demanding their domestic currency, YEN.