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Stock Market Downswing and the Stability of European Monetary Union Money Demand

Listed author(s):
  • Carstensen, Kai

This article analyzes the question whether money demand in the euro area underwent a structural change in the end of 2001 when M3 money growth started to considerably overshoot the reference value set by the European Central Bank. It is found that conventional specifications of money demand have in fact become unstable, whereas specifications that are augmented with equity returns and volatility remain stable. Using such an augmented specification, it turns out that the high M3 growth rates have not led to excess liquidity and thus do not pose a measurable threat to price stability.

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Article provided by American Statistical Association in its journal Journal of Business and Economic Statistics.

Volume (Year): 24 (2006)
Issue (Month): (October)
Pages: 395-402

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Handle: RePEc:bes:jnlbes:v:24:y:2006:p:395-402
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  17. Bruggeman, Annick & Donati, Paola & Warne, Anders, 2003. "Is the demand for euro area M3 stable?," Working Paper Series 255, European Central Bank.
  18. Ploberger, Werner & Kramer, Walter & Kontrus, Karl, 1989. "A new test for structural stability in the linear regression model," Journal of Econometrics, Elsevier, vol. 40(2), pages 307-318, February.
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