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Eurozone money demand: time series and dynamic panel results

  • E.M. Bosker

The effectiveness of the important role for money in the monetary policy of the European Central Bank (ECB) is usually assessed by looking at time series estimates of the eurozone money demand equation. This implicitly calls for a choice of aggregation method to construct data series long enough to obtain meaningful econometric results. This study discusses different aggregation methods and finds that variable weight growth rate aggregation has the nicest properties. The results based on the hereby constructed series confirm the effectiveness of the ECB's monetary policy. Next this study tries to avoid the issue of aggregation by adopting a (nonstationary) dynamic panel method that uses the data series for each of the eurozone countries by itself. This shows that differences in the money demand equation across the eurozone countries are likely to exist. Not being able to quantify these differences makes it difficult to give specific implications for the ECB's monetary policy. The found differences could however influence the time series estimates and through these have implications for the ECB's monetary policy.

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Paper provided by Netherlands Central Bank, Research Department in its series WO Research Memoranda (discontinued) with number 750.

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Length: 67 pages
Date of creation: Nov 2003
Handle: RePEc:dnb:wormem:750
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