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Housing wealth, financial wealth, money demand and policy rule: Evidence from the euro area

  • Sousa, Ricardo M.

This paper investigates empirically the relation between monetary policy and asset markets using quarterly data for the euro area. I find that a monetary policy contraction leads to a substantial fall in wealth. Nevertheless, while financial wealth effects are of short duration, housing wealth effects are very persistent. After a positive interest rate shock there is a flight towards assets that are less liquid and earn higher rates of return. Moreover, expected inflation seems to be the major source of fluctuations in nominal rates over long periods. Finally, the findings suggest that the money demand function is characterized by small output elasticity and large interest elasticity. By its turn, the estimated policy rule reveals that the monetary authority pays a special attention to developments in monetary aggregates and adopts a vigilant posture regarding financial markets.

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Article provided by Elsevier in its journal The North American Journal of Economics and Finance.

Volume (Year): 21 (2010)
Issue (Month): 1 (March)
Pages: 88-105

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Handle: RePEc:eee:ecofin:v:21:y:2010:i:1:p:88-105
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