Is the euro area M3 abandoning us?

Abstract

This paper reassesses the role of the M3 aggregate for monetary policy purposes in the euro area. Using data until 2006Q4 it is shown that the M3 aggregate ceased to display the empirical properties that supported its prominent role in the ECB’s monetary policy strategy. On the one hand, when the most recent data are used in the analysis there is strong evidence of cointegration breakdown in the M3 money demand models as well as in the "two-pillar Phillips curves" with filtered data. On the other hand, the leading indicator properties of M3 for inflation in the area have also deteriorated markedly in the most recent years. This is supported by evidence both in the time and frequency domains.