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The sectoral distribution of money supply in the Euro area

Author Info

Listed author(s):
  • Giuseppe Ferrero

    ()

    (Banca d'Italia)

  • Andrea Nobili

    ()

    (Banca d'Italia)

  • Patrizia Passiglia

    ()

    (Banca d'Italia)

Abstract

The strong and prolonged deviation of money growth from its reference value since 2001 has caused concern among policy-makers about the upside risks to price stability from monetary developments. In this paper we provide evidence that these risks might be smaller than previously assumed. We provide a sectoral breakdown of money holdings and show that current excess liquidity conditions are in some measure related to the acceleration of non-bank financial intermediaries� money demand, as well as to the accumulation of marketable instruments. Such increases are likely to be related more to portfolio choices than to transaction motives. We also find evidence from balance sheet data on investment funds that points to a general increase of this sector in the economy, rather than to a higher degree of liquidity of their asset positions. This is likely to imply that recent dynamics reflect, to a large extent, a permanent change in the financial structure of the economy. Finally, our sectoral analysis suggests that the threat to price stability did not appear before the end of 2005, which is also when the ECB started to raise the official interest rates.

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File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2007/2007-0627/en_tema_627.pdf
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Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 627.

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Date of creation: Apr 2007
Handle: RePEc:bdi:wptemi:td_627_06
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Keywords: money holding sector; excess liquidity; money supply;

Find related papers by JEL classification:

  • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
  • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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  1. Carlos Robalo Marques & Nuno Alves & João Sousa, 2006. "Some Issues Concerning the Use of M3 for Monetary Policy Analysis in the Euro Area," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
  2. Gerlach, Stefan & Svensson, Lars E. O., 2003. "Money and inflation in the euro area: A case for monetary indicators?," Journal of Monetary Economics, Elsevier, vol. 50(8), pages 1649-1672, November.
  3. K. Alec Chrystal & Paul Mizen, 2005. "Other financial corporations: Cinderella or ugly sister of empirical monetary economics?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 10(1), pages 63-80.
  4. Hiroshi Fujiki & Casey B. Mulligan, 1996. "Production, Financial Sophistication, and the Demand for Money by Households and Firms," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 14(1), pages 65-103, July.
  5. Laidler, David, 1997. "Notes on the Microfoundations of Monetary Economics," Economic Journal, Royal Economic Society, vol. 107(443), pages 1213-1223, July.
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  7. Nicoletti-Altimari, Sergio, 2001. "Does money lead inflation in the euro area?," Working Paper Series 0063, European Central Bank.
  8. Drake, Leigh & Chrystal, K Alec, 1994. "Company-Sector Money Demand: New Evidence on the Existence of a Stable Long-Run Relationship for the United Kingdom," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(3), pages 479-494, August.
  9. Bruggeman, Annick & Donati, Paola & Warne, Anders, 2003. "Is the demand for euro area M3 stable?," Working Paper Series 255, European Central Bank.
  10. Hallman, Jeffrey J & Porter, Richard D & Small, David H, 1991. "Is the Price Level Tied to the M2 Monetary Aggregate in the Long Run?," American Economic Review, American Economic Association, vol. 81(4), pages 841-858, September.
  11. Ryland Thomas, 1997. "The Demand for M4: A Sectoral Analysis. Part 1 - The Personal Sector," Bank of England working papers 61, Bank of England.
  12. Hofmann, Boris, 2006. "Do monetary indicators (still) predict euro area inflation?," Discussion Paper Series 1: Economic Studies 2006,18, Deutsche Bundesbank, Research Centre.
  13. DETKEN Carsten & SMETS Frank, "undated". "Asset Price Booms and Monetary Policy," EcoMod2003 330700042, EcoMod.
  14. Mizen, Paul, 1996. "Modeling the demand for money in the industrial and commercial companies sector in the United Kingdom," Journal of Policy Modeling, Elsevier, vol. 18(4), pages 445-467, August.
  15. Joaquim Vieira Ferreira Levy & Alessandro Calza & Dieter Gerdesmeier, 2001. "Euro Area Money Demand; Measuring the Opportunity Costs Appropriately," IMF Working Papers 01/179, International Monetary Fund.
  16. Cassola, Nuno & Morana, Claudio, 2004. "Monetary policy and the stock market in the euro area," Journal of Policy Modeling, Elsevier, vol. 26(3), pages 387-399, April.
  17. Brand, Claus & Cassola, Nuno, 2000. "A money demand system for euro area M3," Working Paper Series 0039, European Central Bank.
  18. Ireland, Jonathan & Wren-Lewis, Simon, 1992. "Buffer Stock Money and the Company Sector," Oxford Economic Papers, Oxford University Press, vol. 44(2), pages 209-231, April.
  19. Ryland Thomas, 1997. "The Demand for M4: A Sectoral Analysis Part 2 The Corporate Sector," Bank of England working papers 62, Bank of England.
  20. Claudia Biancotti, 2006. "A Dual-Regime Utility Model for Poverty Analysis," Temi di discussione (Economic working papers) 603, Bank of Italy, Economic Research and International Relations Area.
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  22. Philip Lowe & Claudio Borio, 2002. "Asset prices, financial and monetary stability: exploring the nexus," BIS Working Papers 114, Bank for International Settlements.
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Cited by:

  1. Ralph Setzer & Guntram Wolff, 2013. "Money demand in the euro area: new insights from disaggregated data," International Economics and Economic Policy, Springer, vol. 10(2), pages 297-315, June.
  2. Lucas Papademos, 2007. "The Effects of Globalization on Inflation, Liquidity and Monetary Policy," NBER Chapters,in: International Dimensions of Monetary Policy, pages 593-608 National Bureau of Economic Research, Inc.
  3. Domenico Giannone & Michèle Lenza & Lucrezia Reichlin, 2012. "Money, Credit, Monetary Policy and the Business Cycle in the Euro Area," Working Papers ECARES ECARES 2012-008, ULB -- Universite Libre de Bruxelles.
  4. Andrea Nobili, 2009. "Composite indicators for monetary analysis," Temi di discussione (Economic working papers) 713, Bank of Italy, Economic Research and International Relations Area.

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