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Demand for money in the Euro area

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  • Hamori, Shigeyuki
  • Hamori, Naoko

Abstract

We analyzed the stability of the money demand function using panel data from January 1999 through March 2006, covering the 11 EU countries (Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, and Spain). First, we found that the money demand function was stable with respect to M3. This arguably supports the suitability of the ECB's focus on M3 money supply in its monetary policy. Second, the stability of the money demand function was recognized with respect not only to M3, but also to M1 and M2. Accordingly, the ECB's adoption of M1 or M2 growth as a reference value should probably be considered depending on how conditions change going forward.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Systems.

Volume (Year): 32 (2008)
Issue (Month): 3 (September)
Pages: 274-284

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Handle: RePEc:eee:ecosys:v:32:y:2008:i:3:p:274-284

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  1. Gunter Coenen & Juan Luis Vega, 2000. "The Demand for M3 in the Euro Area," Econometric Society World Congress 2000 Contributed Papers 0976, Econometric Society.
  2. Hayo, Bernd, 1998. "Estimating a European demand for money," ZEI Working Papers B 05-1998, ZEI - Center for European Integration Studies, University of Bonn.
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  4. Katrin Wesche, 1997. "The Stability of European Money Demand: An Investigation of M3H," Open Economies Review, Springer, Springer, vol. 8(4), pages 371-391, October.
  5. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, Elsevier, vol. 108(1), pages 1-24, May.
  6. Kimbrough, Kent P., 1986. "The optimum quantity of money rule in the theory of public finance," Journal of Monetary Economics, Elsevier, Elsevier, vol. 18(3), pages 277-284, November.
  7. Carlo C. A. Winder & Martin M. G. Fase, 1998. "Wealth and the demand for money in the European union," Empirical Economics, Springer, Springer, vol. 23(3), pages 507-524.
  8. Maddala, G S & Wu, Shaowen, 1999. " A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-52, Special I.
  9. Peter Pedroni, 2001. "Purchasing Power Parity Tests in Cointegrated Panels," Department of Economics Working Papers 2001-01, Department of Economics, Williams College.
  10. Faig, Miquel, 1988. "Characterization of the optimal tax on money when it functions as a medium of exchange," Journal of Monetary Economics, Elsevier, Elsevier, vol. 22(1), pages 137-148, July.
  11. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, Econometric Society, vol. 59(6), pages 1551-80, November.
  12. Gabriel Fagan & JÊrÆme Henry, 1998. "Long run money demand in the EU: Evidence for area-wide aggregates," Empirical Economics, Springer, Springer, vol. 23(3), pages 483-506.
  13. Kimbrough, Kent P, 1986. "Inflation, Employment, and Welfare in the Presence of Transactions Costs," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 18(2), pages 127-40, May.
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  15. Peter Pedroni, 1999. "Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Department of Economics Working Papers 2000-02, Department of Economics, Williams College.
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Cited by:
  1. Ansgar Belke & Robert Czudaj, 2010. "Is Euro Area Money Demand (Still) Stable? Cointegrated VAR Versus Single Equation Techniques," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot, Berlin, Duncker & Humblot, Berlin, vol. 56(4), pages 285-315.
  2. Syed Basher & Stefano Fachin, 2012. "Investigating Long-Run Demand for Broad Money in the Gulf Arab Countries," DSS Empirical Economics and Econometrics Working Papers Series, Centre for Empirical Economics and Econometrics, Department of Statistics, "Sapienza" University of Rome 2012/6, Centre for Empirical Economics and Econometrics, Department of Statistics, "Sapienza" University of Rome.
  3. Kumar, Saten & Chowdhury, Mamta & Rao, B. Bhaskara, 2010. "Demand for Money in the Selected OECD Countries: A Time Series Panel Data Approach and Structural Breaks," MPRA Paper 22204, University Library of Munich, Germany.
  4. Frauke Dobnik, 2013. "Long-run money demand in OECD countries: what role do common factors play?," Empirical Economics, Springer, Springer, vol. 45(1), pages 89-113, August.
  5. Kumar, Saten, 2011. "Financial reforms and money demand: Evidence from 20 developing countries," Economic Systems, Elsevier, vol. 35(3), pages 323-334, September.
  6. Czudaj, Robert, 2011. "P-star in times of crisis - Forecasting inflation for the euro area," Economic Systems, Elsevier, vol. 35(3), pages 390-407, September.
  7. Frauke Dobnik, 2011. "OLong-run Money Demand in OECD Countries – Cross-Member Cointegration," Ruhr Economic Papers, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen 0237, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.

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