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Is there a structural break in equilibrium velocity in the euro area?

Author

Listed:
  • Bordes, C.
  • Clerc, L.
  • Marimoutou, V.

Abstract

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.

Suggested Citation

  • Bordes, C. & Clerc, L. & Marimoutou, V., 2007. "Is there a structural break in equilibrium velocity in the euro area?," Working papers 165, Banque de France.
  • Handle: RePEc:bfr:banfra:165
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    References listed on IDEAS

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    1. Frederic S. Mishkin, 2009. "Monetary Policy Strategy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262513374, January.
    2. Jushan Bai & Pierre Perron, 2003. "Critical values for multiple structural change tests," Econometrics Journal, Royal Economic Society, vol. 6(1), pages 72-78, June.
    3. 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, April.
    4. 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.
    5. 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.
    6. 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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    Citations

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    Cited by:

    1. Woodford, Michael, 2007. "Does a 'Two-Pillar Phillips Curve' Justify a Two-Pillar Monetary Policy Strategy?," CEPR Discussion Papers 6447, C.E.P.R. Discussion Papers.
    2. Michael Woodford, 2008. "How Important Is Money in the Conduct of Monetary Policy?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(8), pages 1561-1598, December.
    3. Legrand, Romain, 2014. "Euro introduction: Has there been a structural change? Study on 10 European Union countries," Economic Modelling, Elsevier, vol. 40(C), pages 136-151.
    4. repec:eee:ecofin:v:42:y:2017:i:c:p:421-432 is not listed on IDEAS
    5. Clerc, L., 2007. "Understanding Asset Prices: Determinants and Policy Implications," Working papers 168, Banque de France.
    6. Stéphane Sorbe & Timo Wollmershäuser, 2007. "Mittelfristige Inflationsprognose: Das Dilemma der Zwei-Säulen-Strategie der EZB," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 60(11), pages 16-24, June.
    7. Barthélemy, Jean & Clerc, Laurent & Marx, Magali, 2011. "A two-pillar DSGE monetary policy model for the euro area," Economic Modelling, Elsevier, vol. 28(3), pages 1303-1316, May.
    8. MEZUI-MBENG, Pamphile, 2010. "Tramsission de la politique monétaire: le cas des pays de la CEMAC
      [Monetary policy transmission: the case of the CEMAC]
      ," MPRA Paper 26032, University Library of Munich, Germany.

    More about this item

    Keywords

    M3 velocity ; Breakpoint tests; ECB.;

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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