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Is the euro area M3 abandoning us?

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Abstract

This paper reassesses the role of the M3 aggregate for monetary policy purposes in the euro area. Using data until 2006Q4 it is shown that the M3 aggregate ceased to display the empirical properties that supported its prominent role in the ECB’s monetary policy strategy. On the one hand, when the most recent data are used in the analysis there is strong evidence of cointegration breakdown in the M3 money demand models as well as in the "two-pillar Phillips curves" with filtered data. On the other hand, the leading indicator properties of M3 for inflation in the area have also deteriorated markedly in the most recent years. This is supported by evidence both in the time and frequency domains.

Suggested Citation

  • Nuno Alves, 2007. "Is the euro area M3 abandoning us?," Working Papers w200720, Banco de Portugal, Economics and Research Department.
    • Handle: RePEc:ptu:wpaper:w200720
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    Cited by:

    1. Hartmann, Philipp & Smets, Frank, 2018. "The first twenty years of the European Central Bank: monetary policy," Working Paper Series 2219, European Central Bank.
    2. Ralph Setzer & Guntram Wolff, 2013. "Money demand in the euro area: new insights from disaggregated data," International Economics and Economic Policy, Springer, vol. 10(2), pages 297-315, June.
    3. António Rua, 2012. "Money Growth and Inflation in the Euro Area: A Time-Frequency View," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 74(6), pages 875-885, December.
    4. Philipp Hartman & Frank Smets, 2018. "The European Central Bank’s Monetary Policy during Its First 20 Years," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 49(2 (Fall)), pages 1-146.
    5. Matteo Farn'e & Angela Montanari, 2018. "A bootstrap test to detect prominent Granger-causalities across frequencies," Papers 1803.00374, arXiv.org, revised Oct 2018.
    6. Ana Inés Arbiza, 2018. "¿Es estable la demanda de dinero? Análisis del caso Uruguayo," Documentos de trabajo 2018009, Banco Central del Uruguay.
    7. Matteo Barigozzi & Antonio Conti, 2010. "On the Sources of Euro Area Money Demand Stability. A Time-Varying Cointegration Analysis," Working Papers ECARES ECARES 2010-022, ULB -- Universite Libre de Bruxelles.
    8. repec:ptu:bdpart:a201011 is not listed on IDEAS
    9. Ludomir Slahor & Daniela Majercakova & Alexandra Mittelman, 2015. "An Empirical Study of the Correlation between the Monetary Aggregates and the Price Level in Euro Area in the Years 2004 - 2013," Eurasian Journal of Economics and Finance, Eurasian Publications, vol. 3(1), pages 38-50.
    10. Andrea Nobili, 2009. "Composite indicators for monetary analysis," Temi di discussione (Economic working papers) 713, Bank of Italy, Economic Research and International Relations Area.

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