M3 money demand and excess liquidity in the euro area

Recent empirical studies have found evidence of unstable long run money demand functions if recent data are used. If the link between money balances and the macroeconomy is fragile, the rationale of monetary aggregates in the ECB strategy has to be doubted. In contrast we present a ``stable'' long run money demand relationship for M3 for the period 1983-2006. To obtain the result, the short run homogeneity restriction between money and prices is relaxed and a break in the income elasticity of money demand after 2001 is taken into account. Measures of excess liquidity do not show significant inflation pressures.The final publication is available at Springer via http://dx.doi.org/10.1007/s11127-010-9679-5. This publication was produced as part of the FINESS project, funded by the European Commission through the 7th Framework Programme under contract no. 217266 (http://www.finess-web.eu/)

Instabile Geldnachfrage im Euroraum?

Ökonometrische Studien weisen zunehmend auf Instabilitäten in der Geldnachfrage hin. Ein solcher Befund stellt die monetäre Strategie der EZB in Frage, die wesentlich auf einer stabilen Beziehung zwischen den Geldbeständen und ökonomischen Fundamentalvariablen beruht. In diesem Artikel wird jedoch gezeigt, dass die Entwicklung von M3 sowohl kurz- und langfristig im Rahmen einer Standardspezifikation der Geldnachfrage durchaus gerechtfertigt werden kann. Wesentlich für dieses Ergebnis ist die Berücksichtigung und adäquate Interpretation der Inflationsrate in der Geldnachfragefunktion. Abstract Recent econometric studies did not find evidence in favour of a stable long run money demand function. If the link between money balances and the macroeconomy is fragile, the rationale of monetary aggregates in the ECB strategy has to be doubted. In contrast to the bulk of the literature, we are able to identify a stable long run standard money demand relationship. The corresponding error correction model is robust to a number of specification tests. This result can be obtained when the role of the inflation rate in money demand is properly acknowledged. JEL Klassifikation: C22, C52, E4

Money velocity and asset prices in the euro area

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

Are “new” and “old” EU members becoming more financially integrated? A threshold cointegration analysis

Financial integration, Threshold vector error-correction, “New” EU member states, F36, P33,

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