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The sectoral distribution of money supply in the Euro area

  • Giuseppe Ferrero

    ()

    (Banca d'Italia)

  • Andrea Nobili

    ()

    (Banca d'Italia)

  • Patrizia Passiglia

    ()

    (Banca d'Italia)

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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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
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Handle: RePEc:bdi:wptemi:td_627_06
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  1. Nicoletti-Altimari, Sergio, 2001. "Does money lead inflation in the euro area?," Working Paper Series 0063, European Central Bank.
  2. Coenen, Günter & Vega, Juan Luis, 1999. "The demand for M3 in the euro area," Working Paper Series 0006, European Central Bank.
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  16. 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 479-94, August.
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  18. Ireland, Jonathan & Wren-Lewis, Simon, 1992. "Buffer Stock Money and the Company Sector," Oxford Economic Papers, Oxford University Press, vol. 44(2), pages 209-31, April.
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