Money velocity and asset prices in the euro area

Cointegration analysis, Error correction, Money demand, Financial wealth, Monetary policy, C22, C52, E41,

Is Euro Area Money Demand (Still) Stable? Cointegrated VAR Versus Single Equation Techniques

In this paper we present an empirically stable euro area money demand model. Using a sample period until 2009:2 shows that the current financial and economic crisis that started in 2007 does not appear to have any noticeable impact on the stability of the euro area money demand function. We also compare single equation methods like the ARDL approach, FMOLS, CCR and, DOLS with the commonly used cointegrated Johansen VAR framework and show that the former are under certain circumstances more appropriate than the latter. What is more, they deliver results that are more in line with the economic theory. Hence, FM-OLS, CCR and, DOLS are useful in estimating standard money demand as well, although they have only been rarely applied for this purpose in previous studies. JEL Classification: C22, C32, E4