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Money Demand in Europe: Evidence from the Past

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  • Elke Hahn
  • Christian Müller

Abstract

The conditions under which European monetary policy is likely to be conducted are investigated by means of multi-variate time series modelling using aggregated data of all eleven European Monetary Union member states. A cointegration analysis identifies two stable long-run relationships within a set of five key macroeconomic variables, one of which can be interpreted as a money demand function and a second one as a long term real interest rate (Fisher parity). Our findings indicate that monetary authorities might well be able to base their policy on the existence of a money demand. Particular emphasis is given both to the data sources and their aggregation, by providing a transparent account of our calculation procedure, which is not yet common in the existing literature.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.38555.de/dp204.pdf
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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 204.

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Length: 24 p.
Date of creation: 2000
Date of revision:
Handle: RePEc:diw:diwwpp:dp204

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References

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  1. James G. MacKinnon, 2010. "Critical Values for Cointegration Tests," Working Papers 1227, Queen's University, Department of Economics.
  2. Katrin Wesche, 1997. "The Stability of European Money Demand: An Investigation of M3H," Open Economies Review, Springer, vol. 8(4), pages 371-391, October.
  3. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  4. Gunter Coenen & Juan Luis Vega, 2000. "The Demand for M3 in the Euro Area," Econometric Society World Congress 2000 Contributed Papers 0976, Econometric Society.
  5. Kirstin Hubrich & Helmut Lutkepohl & Pentti Saikkonen, 2001. "A Review Of Systems Cointegration Tests," Econometric Reviews, Taylor & Francis Journals, vol. 20(3), pages 247-318.
  6. Carlo Monticelli & Marc-Olivier Strauss-Kahn, 1992. "European integration and the demand for broad money," BIS Working Papers 18, Bank for International Settlements.
  7. Carlo Monticelli, 1996. "EU-wide money and cross-border holdings," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 132(2), pages 215-235, September.
  8. Lutkepohl, Helmut & Saikkonen, Pentti, 2000. "Testing for the cointegrating rank of a VAR process with a time trend," Journal of Econometrics, Elsevier, vol. 95(1), pages 177-198, March.
  9. Jan Gottschalk, 1999. "A Cointegration Analysis of a Money Demand System in Europe," Kiel Working Papers 902, Kiel Institute for the World Economy.
  10. Jeroen J. M. Kremers & Timothy D. Lane, 1990. "Economic and Monetary Integration and the Aggregate Demand for Money in the EMS," IMF Staff Papers, Palgrave Macmillan, vol. 37(4), pages 777-805, December.
  11. repec:wop:humbsf:1998-101 is not listed on IDEAS
  12. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  13. Neil R. Ericsson, 1998. "Empirical modeling of money demand," Empirical Economics, Springer, vol. 23(3), pages 295-315.
  14. Ivo Arnold, 1994. "The myth of a stable European money demand," Open Economies Review, Springer, vol. 5(3), pages 249-259, July.
  15. Johansen, Soren, 1995. "Identifying restrictions of linear equations with applications to simultaneous equations and cointegration," Journal of Econometrics, Elsevier, vol. 69(1), pages 111-132, September.
  16. Gabriel Fagan & JÊrÆme Henry, 1998. "Long run money demand in the EU: Evidence for area-wide aggregates," Empirical Economics, Springer, vol. 23(3), pages 483-506.
  17. Saikkonen, Pentti & Luukkonen, Ritva, 1997. "Testing cointegration in infinite order vector autoregressive processes," Journal of Econometrics, Elsevier, vol. 81(1), pages 93-126, November.
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Cited by:
  1. Jan Gottschalk, 2001. "Measuring Expected Inflation and the Ex-Ante Real Interest Rate in the Euro Area Using Structural Vector Autoregressions," Kiel Working Papers 1067, Kiel Institute for the World Economy.
  2. Jan Gottschalk & Stéphanie Stolz, 2001. "The Link of the Monetary Indicator to Future Inflation in the Euro Area � A Simulation Experiment," Kiel Working Papers 1057, Kiel Institute for the World Economy.

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