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Investigating M3 money demand in the euro area

  • Dreger, Christian
  • Wolters, Jürgen

Euro area monetary growth has exceeded its target since 2001. Likewise, recent empirical studies did not find evidence in favour of a stable long-run money demand function. In contrast to the bulk of the literature, we are able to identify a stable long-run money demand relationship. This result is obtained when the analysis is done without the short run homogeneity restriction between money and prices. The basic equation can be improved by allowing for asymmetric adjustment. In a low inflation environment, opportunity costs of holding money have decreased. Thus, the apparent monetary overhang is reconciled within standard models.

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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 29 (2010)
Issue (Month): 1 (February)
Pages: 111-122

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Handle: RePEc:eee:jimfin:v:29:y:2010:i:1:p:111-122
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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