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Money demand in the euro area: new insights from disaggregated data

  • Ralph Setzer


  • Guntram Wolff


Conventional money demand specifications in the euro area have become unstable since 2001. We specify a money demand equation in deviations of individual euro area Member States variables from the euro area average and show that the income elasticity as well as the interest rate semi-elasticity remain stable. The corresponding deep parameters of the utility function have not changed fundamentally. Aggregate money demand instability does therefore not result from altered standard factors determining the preference for holding money. Instead, other factors determine the aggregate monetary overhang. Since monetary developments cannot easily be explained by changing preferences, they should be closely monitored as they may actually be a sign of other factors. Copyright Springer-Verlag 2013

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Article provided by Springer in its journal International Economics and Economic Policy.

Volume (Year): 10 (2013)
Issue (Month): 2 (June)
Pages: 297-315

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Handle: RePEc:kap:iecepo:v:10:y:2013:i:2:p:297-315
DOI: 10.1007/s10368-012-0214-7
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