Expected Money Growth, Markov Trends and the Instability of Money Demand in the Euro Area
AbstractThis paper analyzes the recently documented instability of money demand in the euro area in the framework of a Markov switching trend model. First, we consider a standard flexible price model with stable money demand, rational expectations, and an exogenous income-money ratio which follows a Markov trend. This framework, which implies an influence of expected future money on prices, leads to a cointegrating relationship between (log) prices and the (log of the) money-income ratio with a switching intercept term. Of course, this likely leads to a rejection of cointegration by standard tests and to the erroneous conclusion of an unstable money demand. Second, a more general model allowing for endogeneity and more general dynamics is estimated with Bayesian methods for euro area data from 1975-2003. This exercise provides support for our model and a stable demand for M3 in the euro area.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Oesterreichische Nationalbank (Austrian Central Bank) in its series Working Papers with number 131.
Date of creation: 15 Sep 2006
Date of revision:
Postal: Oesterreichische Nationalbank, Economic Studies Division, c/o Beate Hofbauer-Berlakovich, POB 61, A-1011 Vienna, Austria
Other versions of this item:
- Sylvia Kaufmann & Peter Kugler, 2005. "Expected Money Growth, Markov Trends and the Instability of Money Demand in the Euro Area," Working papers 2005/07, Faculty of Business and Economics - University of Basel.
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-10-14 (All new papers)
- NEP-CBA-2006-10-14 (Central Banking)
- NEP-EEC-2006-10-14 (European Economics)
- NEP-MAC-2006-10-14 (Macroeconomics)
- NEP-MON-2006-10-14 (Monetary Economics)
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.:
- Kaufmann, Sylvia & Kugler, Peter, 2005.
"Does Money Matter for Inflation in the Euro Area?,"
103, Oesterreichische Nationalbank (Austrian Central Bank).
- Albert, James H & Chib, Siddhartha, 1993. "Bayes Inference via Gibbs Sampling of Autoregressive Time Series Subject to Markov Mean and Variance Shifts," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(1), pages 1-15, January.
- Kleibergen, Frank & Paap, Richard, 2002.
"Priors, posteriors and bayes factors for a Bayesian analysis of cointegration,"
Journal of Econometrics,
Elsevier, vol. 111(2), pages 223-249, December.
- Kleibergen, F.R. & Paap, R., 1998. "Priors, posteriors and Bayes factors for a Bayesian analysis of cointegration," Econometric Institute Research Papers EI 9821, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
- Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
- Richard Paap & Frank Kleibergen, 2004.
"Generalized Reduced Rank Tests using the Singular Value Decomposition,"
Econometric Society 2004 Australasian Meetings
195, Econometric Society.
- Kleibergen, Frank & Paap, Richard, 2006. "Generalized reduced rank tests using the singular value decomposition," Journal of Econometrics, Elsevier, vol. 133(1), pages 97-126, July.
- Kleibergen, F.R. & Paap, R., 2003. "Generalized Reduced Rank Tests using the Singular Value Decomposition," Econometric Institute Research Papers EI 2003-01, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
- Frank Kleibergen & Richard Paap, 2003. "Generalized Reduced Rank Tests using the Singular Value Decomposition," Tinbergen Institute Discussion Papers 03-003/4, Tinbergen Institute.
- Warne, Anders & Bruggeman, Annick & Donati, Paola, 2003. "Is the demand for euro area M3 stable?," Working Paper Series 0255, European Central Bank.
- Kai Carstensen, 2003. "Is European Money Demand Still Stable?," Kiel Working Papers 1179, Kiel Institute for the World Economy.
- Paap, Richard & van Dijk, Herman K, 2003.
"Bayes Estimates of Markov Trends in Possibly Cointegrated Series: An Application to U.S. Consumption and Income,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 21(4), pages 547-63, October.
- Richard Paap & Herman K. van Dijk, 1999. "Bayes Estimates of Markov Trends in Possibly Cointegrated Series: An Application to US Consumption and Income," Tinbergen Institute Discussion Papers 99-024/4, Tinbergen Institute.
- Paap, R. & van Dijk, H.K., 2002. "Bayes estimates of Markov trends in possibly cointegrated series: an application to US consumption and income," Econometric Institute Research Papers EI 2002-42, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
- Hamilton, James D., 1988. "Rational-expectations econometric analysis of changes in regime : An investigation of the term structure of interest rates," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 385-423.
- Hall, Stephen G & Psaradakis, Zacharias & Sola, Martin, 1997. "Cointegration and Changes in Regime: The Japanese Consumption Function," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 12(2), pages 151-68, March-Apr.
- Kugler, Peter, 1996. "The term structure of interest rates and regime shifts: Some empirical results," Economics Letters, Elsevier, vol. 50(1), pages 121-126, January.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Markus Knell and Helmut Stix).
If references are entirely missing, you can add them using this form.