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La fonction de demande de monnaie pour la zone euro : un réexamen

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  • Avouyi-Dovi, S.
  • Brun, M.
  • Dreyfus, A.
  • Drumetz, F.
  • Oung, V.
  • Sahuc, J-G.

Abstract

In recent years, the dynamics of M3 in the euro area have been driven by two factors: a strong preference for liquidity, observed between 2001 and 2003, followed by a normalisation, at a relatively moderate pace, of portfolio behaviour; as regards the counterparts, changes in M3 and net external assets were of comparable magnitude. These factors highlight the role of national and international portfolio shifts in monetary developments. Furthermore, the traditional specifications of the money demand function sometimes yield unsatisfactory results: instability of short and long-term coefficients, relatively large differences between the estimated and actual value of monetary aggregates, and significant changes in the number of long-run relations. Hence the idea of constructing a money demand function that excludes the external counterpart of M3 or, alternatively, introducing financial asset prices in the demand function of M3, as suggested by Friedman (1988). First, the basic equation, based on the quantitative equation of money, was reestimated in order to verify, for example, whether extending the estimation period or revising certain variables would not result in a major change, notably in terms of the stability of the parameters or the number of structural relations. Indeed, this equation exhibits two instabilities (parameters and the number of long-run relations). Similar results are obtained when the external counterpart of M3 is not taken into account. However, by including European share prices, we obtain a substitution effect (significantly negative coefficient) of this variable and a better adjustment, without affecting the two long-run relations (money demand and the Fisher relation) discussed in the article published in Banque de France Monthly Digest No. 113. So, all other things being equal, a decline in European stock market yields would result in a rise in real money holdings and a decrease in the velocity of circulation of money. Equity market developments therefore appear to be a significant explanatory factor for the dynamics of M3 in the euro area. Lastly, estimates of the real money gap, based on the money demand equation factoring in the substitution effect associated with European stock price developments, point to moderate but persistent excess liquidity in the euro area.

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Bibliographic Info

Paper provided by Banque de France in its series Working papers with number 142.

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Length: 25 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:bfr:banfra:142

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Keywords: Money demand ; M3 own rate ; Wealth effect ; Substitution effect.;

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Cited by:
  1. De Santis, Roberto A & Favero, Carlo A. & Roffia, Barbara, 2012. "Euro Area Money Demand and International Portfolio Allocation: A Contribution to Assessing Risks to Price Stability," CEPR Discussion Papers 8957, C.E.P.R. Discussion Papers.
  2. Mehrotra, Aaron & Ponomarenko, Alexey A., 2010. "Wealth effects and Russian money demand," BOFIT Discussion Papers 13/2010, Bank of Finland, Institute for Economies in Transition.
  3. Andrea Nobili, 2009. "Composite indicators for monetary analysis," Temi di discussione (Economic working papers) 713, Bank of Italy, Economic Research and International Relations Area.
  4. Bordes, C. & Clerc, L. & Marimoutou, V., 2007. "Is there a structural break in equilibrium velocity in the euro area?," Working papers 165, Banque de France.
  5. repec:hal:cesptp:hal-00308654 is not listed on IDEAS

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