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The demand for M3 in the euro area

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Author Info
Günter Coenen () (European Central Bank, Directorate General Research)
Juan-Luis Vega () (European Central Bank, Directorate General Research)

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Abstract

In this paper, an empirically stable money demand model for M3 in the euro area is constructed. Starting with a multivariate system, three cointegrating relationships with economic content are found: (i) the spread between the long- and the short-term nominal interest rates, (ii) the long-term real interest rate, and (iii) a long-run demand for broad money M3. There is evidence that the determinants of M3 money demand are weakly exogenous with respect to the long-run parameters. Hence, following a general-to-specific modelling approach, a parsimonious conditional error-correction model for M3 money demand is derived which can be interpreted economically. For the conditional model, longand short-run parameter stability is extensively tested and not rejected. Insights into the dynamics of money demand are gained by means of SVAR techniques exploring the impulse response functions of the cointegrated multivariate system.

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Paper provided by European Central Bank in its series Working Paper Series with number 6.

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Length: 56 pages
Date of creation: Sep 1999
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Handle: RePEc:ecb:ecbwps:19990006

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Related research
Keywords: Money demand; euro area; cointegration; error-correction model; impulse response analysis;

Other versions of this item:

Find related papers by JEL classification:
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

References listed on IDEAS
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