Is there a structural break in equilibrium velocity in the euro area?
We investigate the stability of M3 income velocity in the euro area. We apply a set of breakpoint procedures to examine this issue and conclude that at least one structural change occurred around 2000-2001. We also find evidence of another structural break around 1992-1993. These two breaks seem to affect both the level and the slope of the income velocity of M3. We then estimate a model of equilibrium velocity that factors in the opportunity cost of M3, along the lines suggested by Orphanides and Porter (2000). Here again, we find some evidence of instability in equilibrium velocity. Given the importance of the assumption of stable velocity trends for both the derivation of the reference value and the two-pillar strategy of the Eurosystem, these findings question the relevance of some excess liquidity indicators directly computed from the reference value and may call for some adjustments in the conduct of the ECB's monetary policy.
|Date of creation:||2007|
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- Beck, Günter & Wieland, Volker, 2007.
"Money in Monetary Policy Design: A Formal Characterization of ECB-Style Cross-Checking,"
CEPR Discussion Papers
6097, C.E.P.R. Discussion Papers.
- Guenter W. Beck & Volker Wieland, 2007. "Money in Monetary Policy Design: A Formal Characterization of ECB-Style Cross-Checking," Journal of the European Economic Association, MIT Press, vol. 5(2-3), pages 524-533, 04-05.
- Drumetz, F. & Avouyi-Dovi, S. & Brun, M. & Dreyfus, A. & Oung, V. & Sahuc, J-G., 2005.
"La fonction de demande de monnaie pour la zone euro : un réexamen,"
Bulletin de la Banque de France,
Banque de France, issue 142, pages 23-39.
- Avouyi-Dovi, S. & Brun, M. & Dreyfus, A. & Drumetz, F. & Oung, V. & Sahuc, J-G., 2006. "La fonction de demande de monnaie pour la zone euro : un réexamen," Working papers 142, Banque de France.
- Jushan Bai & Pierre Perron, 2003. "Critical values for multiple structural change tests," Econometrics Journal, Royal Economic Society, vol. 6(1), pages 72-78, 06.
- Christian Bordes & Laurent Clerc, 2007.
"Price Stability and the ECB'S monetary policy strategy,"
Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers)
- Christian Bordes & Laurent Clerc, 2007. "Price Stability And The Ecb'S Monetary Policy Strategy," Journal of Economic Surveys, Wiley Blackwell, vol. 21(2), pages 268-326, 04.
- Bordes, C. & Clerc, L., 2004. "Price Stability and The ECB's Monetary Policy Strategy," Working papers 109, Banque de France.
- Frederic S. Mishkin, 2007.
"Monetary Policy Strategy,"
MIT Press Books,
The MIT Press,
edition 1, volume 1, number 0262134829, December.
- Carlson, John B. & Craig, Ben & Schwarz, Jeffrey C., 2000. "Structural uncertainty and breakpoint tests: an application to equilibrium velocity1," Journal of Economics and Business, Elsevier, vol. 52(1-2), pages 101-115.
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