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The functional form of the demand for euro area M1

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Author Info
Livio Stracca () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)

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Abstract

A remarkable development seen in recent years is the pronounced decline in euro area M1 velocity vis-a-vis a moderate decline in short-term interest rates, which represent the most natural opportunity cost for M1. This paper endeavous to estimate a demand function for euro area M1, in particular by investigating its functional form. While the double log function is found to be very close to the true "deep" functional form of M1 demand in the euro area for most of the sample period, consistent with the findings of Chadha, Haldane and Janssen (1998) for the United Kingdom and of Lucas (2000) for the United States, there is also evidence of an increased interest rate elasticity in M1 demand in the most recent years, presumably owing to the transition to the new policy environment prevailing from the start of Stage Three of EMU and the associated decline in nominal short-term interest rates. JEL Classification: E41; E52.

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Paper provided by European Central Bank in its series Working Paper Series with number 051.

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Length: 41 pages
Date of creation: Mar 2001
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Handle: RePEc:ecb:ecbwps:20010051

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Related research
Keywords: M1; money demand; interest rate elasticity; cointegration; Kalman filter.;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Gunter Coenen & Volker Wieland, 2000. "A Small Estimated Euro-Area Model with Rational Expectations and Nominal Rigidities," Econometric Society World Congress 2000 Contributed Papers 1284, Econometric Society. [Downloadable!]
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  2. Orphanides, Athanasios & Wieland, Volker, 2000. "Inflation zone targeting," European Economic Review, Elsevier, vol. 44(7), pages 1351-1387, June. [Downloadable!] (restricted)
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  3. Ignazio Angeloni & Luca Dedola, 1999. "From the ERM to the euro: new evidence on economic and policy convergence among EU countries," Working Paper Series 4, European Central Bank. [Downloadable!]
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  4. Carlo Monticelli & Oreste Tristani, 1999. "What does the single monetary policy do? A SVAR benchmark for the European Central Bank," Working Paper Series 2, European Central Bank. [Downloadable!]
  5. Francesco P. Mongelli & Oliver De Bandt, 2000. "Convergence of fiscal policies in the Euro area," Working Paper Series 20, European Central Bank. [Downloadable!]
  6. Gabriel Fagan & Jérôme Henry & Ricardo Mestre, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 42, European Central Bank. [Downloadable!]
  7. Olivier de Bandt & E Philip Davis, 1999. "A cross-country comparison of market structures in European banking," Working Paper Series 7, European Central Bank. [Downloadable!]
  8. de Bandt, Olivier & Hartmann, Philipp, 2000. "Systemic Risk: A Survey," CEPR Discussion Papers 2634, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Diego Rodriguez Palenzuela & Gonzalo Camba-Mendez & Juan Angel Garcia, 2003. "Relevant economic issues concerning the optimal rate of inflation," Working Paper Series 278, European Central Bank. [Downloadable!]
  2. Carsten Detken & Vincent Brousseau, 2001. "Monetary policy and fears of financial instability," Working Paper Series 089, European Central Bank. [Downloadable!]
  3. Jean-Bernard Chatelain & Andrea Generale & Ignacio Hernando & Philip Vermeulen & Ulf von Kalckreuth, 2001. "Firm investment and monetary policy transmission in the Euro area," Working Paper Series 112, European Central Bank. [Downloadable!]
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  4. Livio Stracca, 2001. "Does liquidity matter? Properties of the synthetic divisia monetary aggregate in the Euro area," Working Paper Series 079, European Central Bank. [Downloadable!]
  5. Michael Ehrmann & Frank Smets, 2001. "Uncertain potential output: implications for monetary policy," Working Paper Series 059, European Central Bank. [Downloadable!]
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  6. Eugenio Gaiotti & Andrea Generale, 2001. "Does monetary policy have asymmetric effects? A look at the investment decisions of Italian firms," Working Paper Series 110, European Central Bank. [Downloadable!]
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  7. Alessandro Calza & Andrea Zaghini, 2008. "Nonlinearities in the dynamics of the euro area demand for M1," Temi di discussione (Economic working papers) 690, Bank of Italy, Economic Research Department. [Downloadable!]
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  8. Gonzalo Camba-Mendez & George Kapetanios, 2001. "Spectral based methods to identify common trends and common cycles," Working Paper Series 062, European Central Bank. [Downloadable!]
  9. Alessandro Calza & Andrea Zaghini, 2006. "Non-linear dynamics in the euro area demand for M1," Working Paper Series 592, European Central Bank. [Downloadable!]
  10. Dumitru, Ionut, 2002. "Money Demand in Romania," MPRA Paper 10629, University Library of Munich, Germany. [Downloadable!]
  11. Reimers, Hans-Eggert, 2002. "Analysing Divisia Aggregates for the Euro Area," Discussion Paper Series 1: Economic Studies 2002,13, Deutsche Bundesbank, Research Centre. [Downloadable!]
  12. Fidrmuc, Jarko, 2006. "Money Demand and Disinflation in Selected CEECs during the Accession to the EU," Discussion Papers in Economics 1232, University of Munich, Department of Economics. [Downloadable!]
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  13. Ingrid Größl & Ulrich Fritsche, 2007. "The Store-of-Value-Function of Money as a Component of Household Risk Management," Discussion Papers of DIW Berlin 660, DIW Berlin, German Institute for Economic Research. [Downloadable!]
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  14. Stefan Straetmans & Casper G. De Vries & Philipp Hartmann, 2001. "Asset market linkages in crisis periods," Working Paper Series 071, European Central Bank. [Downloadable!]
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  15. Andreas Worms, 2001. "The reaction of bank lending to monetary policy measures in Germany," Working Paper Series 096, European Central Bank. [Downloadable!]
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