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On the Empirical Relevance of the Lucas Critique: the Case of Euro Area Money Demand

Listed author(s):
  • Dreger, Christian
  • Wolters, Jürgen

This paper examines the relevance of the Lucas critique for euro area money demand. Based on the money in the utility function approach, a vector error correction model is specified to investigate the relationship between money and inflation in times of policy shifts. A well defined equation for money demand is obtained. The results indicate that the evolution of M3 is still in line with money demand. In the long run, inflation is affected by asset prices and detrended output. Our results show that the Lucas critique can be refuted in case of euro area money demand for the period of quantitative easing. Thus, the estimated money demand equation provides reliable information for the conduct of future monetary policy.

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File URL: https://www.econstor.eu/bitstream/10419/157917/1/Dreger_2016_Empirical-Relevance-Lucas.pdf
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Article provided by ZBW - German National Library of Economics in its journal EconStor Open Access Articles.

Volume (Year): (2016)
Issue (Month): ()
Pages: 61-82

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Handle: RePEc:zbw:espost:157917
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