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Milton Friedman, the Demand for Money and the ECB’s Monetary-Policy Strategy

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  • Stephen Hall

    ()

  • P.A.V.B. Swamy
  • George S. Tavlas

    ()

Abstract

The European Central Bank (ECB) assigns a greater weight to the role of money in its monetary-policy strategy than most, if not all, other major central banks. Nevertheless, reflecting the view that the demand for money became unstable in the early-2000s, some commentators in the press have reported that the ECB has “downgraded” the role of money-demand functions in its strategy. This paper explains the ECB’s monetary-policy strategy and shows the considerable influence of Milton Friedman’s contributions on the formulation of that strategy. The paper also provides new evidence on the stability of euro-area money-demand. Following a conjecture made by Friedman (1956), we assign a role to uncertainty in the money-demand function. We find that, although uncertainty is mean–reverting, it is none-the-less non-stationary, subject to wide swings, and has substantial effects on the demand for money.

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Bibliographic Info

Paper provided by Department of Economics, University of Leicester in its series Discussion Papers in Economics with number 12/05.

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Date of creation: Apr 2012
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Handle: RePEc:lec:leecon:12/05

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Keywords: ECB’s monetary-policy strategy; Milton Friedman; money demand;

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References

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  1. P. Swamy & George Tavlas, 2005. "Theoretical conditions under which monetary policies are effective and practical obstacles to their verification," Economic Theory, Springer, Springer, vol. 25(4), pages 999-1005, 06.
  2. Issing,Otmar, 2008. "The Birth of the Euro," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521516730.
  3. Stephen Hall & P. Swamy & George Tavlas, 2012. "Generalized cointegration: a new concept with an application to health expenditure and health outcomes," Empirical Economics, Springer, Springer, vol. 42(2), pages 603-618, April.
  4. Issing,Otmar, 2008. "The Birth of the Euro," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521731867.
  5. Stephen G Hall & George Hondroyiannis & P.A.V.B. Swamy & George S. Tavlas, 2008. "A Portfolio Balance Approach to Euro-Area Money Demand in a Time-Varying Environment," Discussion Papers in Economics, Department of Economics, University of Leicester 08/9, Department of Economics, University of Leicester.
  6. P. Swamy & George Tavlas, 2007. "The New Keynesian Phillips Curve and Inflation Expectations: Re-Specification and Interpretation," Economic Theory, Springer, Springer, vol. 31(2), pages 293-306, May.
  7. Issing,Otmar & Gaspar,Vitor & Angeloni,Ignazio & Tristani,Oreste, 2001. "Monetary Policy in the Euro Area," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521788885.
  8. P.A.V.B. Swamy & George S. Tavlas & Stephen G. Hall & George Hondroyiannis, 2008. "Estimation of Parameters in the Presence of Model misspecification and Measurement Error," Discussion Papers in Economics, Department of Economics, University of Leicester 08/27, Department of Economics, University of Leicester.
  9. George S. Tavlas, 1998. "Was the Monetarist Tradition Invented?," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 12(4), pages 211-222, Fall.
  10. Johansen, Soren, 1995. "Identifying restrictions of linear equations with applications to simultaneous equations and cointegration," Journal of Econometrics, Elsevier, Elsevier, vol. 69(1), pages 111-132, September.
  11. Stephen G. Hall & George Hondroyiannis & P. A. V. B. Swamy & G. S. Tavlas, 2009. "The New Keynesian Phillips Curve and Lagged Inflation: A Case of Spurious Correlation?," Southern Economic Journal, Southern Economic Association, vol. 76(2), pages 467-481, October.
  12. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867-1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1.
  13. Gaspar,Vítor & Issing,Otmar & Tristani,Oreste & Vestin,David, 2006. "Imperfect Knowledge and Monetary Policy," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521671071.
  14. repec:cup:cbooks:9780521783248 is not listed on IDEAS
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Cited by:
  1. Haider, Adnan & Jan, Asad & Hyder, Kalim, 2012. "On the (IR) Relevance of Monetary Aggregate Targeting in Pakistan: An Eclectic View," MPRA Paper 43422, University Library of Munich, Germany.
  2. Fredj Jawadi & Ricardo M. Sousa, 2012. "Money Demand in the euro area, the US and the UK:Assessing the Role of Nonlinearity," NIPE Working Papers, NIPE - Universidade do Minho 22/2012, NIPE - Universidade do Minho.

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