IDEAS home Printed from https://ideas.repec.org/p/eca/wpaper/2013-57649.html
   My bibliography  Save this paper

On the Sources of Euro Area Money Demand Stability. A Time-Varying Cointegration Analysis

Author

Listed:
  • Matteo Barigozzi
  • Antonio Conti

Abstract

We adopt a time-varying cointegration test to discriminate among different empirical studies claiming to find a stable Euro Area money demand equation. A time invariant relation explaining real balances is rejected by data, even when accounting for housing, financial and labour markets. Conversely, an international portfolio allocation approach provides stabilization. In particular, international financial markets, rather than monetary policy, are the key determinant of the observed diverging path of money growth. In terms of policy, we provide empirical support for a New Two Pillars Strategy aimed to achieve financial stability through money and credit and price stability through interest rates.

Suggested Citation

  • Matteo Barigozzi & Antonio Conti, 2010. "On the Sources of Euro Area Money Demand Stability. A Time-Varying Cointegration Analysis," Working Papers ECARES ECARES 2010-022, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:eca:wpaper:2013/57649
    as

    Download full text from publisher

    File URL: https://dipot.ulb.ac.be/dspace/bitstream/2013/57649/1/2010-022-BARIGOZZI_CONTI-onthesource.pdf
    File Function: 2010-022-BARIGOZZI_CONTI-onthesource
    Download Restriction: no

    References listed on IDEAS

    as
    1. Anabela Carneiro & Pedro Portugal, 2004. "Workers' Flows and Real Wage Cyclicality," CEF.UP Working Papers 0402, Universidade do Porto, Faculdade de Economia do Porto.
    2. G. Coenen & J.-L. Vega, 2001. "The demand for M3 in the euro area," Journal of Applied Econometrics, John Wiley & Sons, Ltd., pages 727-748.
    3. De Santis, Roberto A. & Favero, Carlo A. & Roffia, Barbara, 2013. "Euro area money demand and international portfolio allocation: A contribution to assessing risks to price stability," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 377-404.
    4. Carstensen, Kai, 2006. "Stock Market Downswing and the Stability of European Monetary Union Money Demand," Journal of Business & Economic Statistics, American Statistical Association, vol. 24, pages 395-402, October.
    5. Driscoll, John C., 2004. "Does bank lending affect output? Evidence from the U.S. states," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 451-471, April.
    6. 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.
    7. 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.
    8. Park, Joon Y. & Hahn, Sang B., 1999. "Cointegrating Regressions With Time Varying Coefficients," Econometric Theory, Cambridge University Press, vol. 15(05), pages 664-703, October.
    9. JØrgen Wolters & Helmut LØtkepohl, 1998. "A money demand system for German M3," Empirical Economics, Springer, pages 371-386.
    10. Beyer, Andreas, 2009. "A Stable Model for Euro Area Money Demand: Revisiting the Role of Wealth," Working Paper Series 1111, European Central Bank.
    11. Claus Brand & Nuno Cassola, 2004. "A money demand system for euro area M3," Applied Economics, Taylor & Francis Journals, vol. 36(8), pages 817-838.
    12. Glenn D. Rudebusch & Lars E. O. Svensson, 1999. "Eurosystem monetary targeting: lessons from U.S. data," Working Paper Series 99-13, Federal Reserve Bank of San Francisco.
    13. Stefan Gerlach, 2004. "The two pillars of the European Central Bank," Economic Policy, CEPR;CES;MSH, vol. 19(40), pages 389-439, October.
    14. Charles Goodhart & Boris Hofmann, 2008. "House prices, money, credit, and the macroeconomy," Oxford Review of Economic Policy, Oxford University Press, vol. 24(1), pages 180-205, spring.
    15. Rudebusch, Glenn D. & Svensson, Lars E. O., 2002. "Eurosystem monetary targeting: Lessons from U.S. data," European Economic Review, Elsevier, pages 417-442.
    16. Ralph Setzer & Guntram B. Wolff, 2009. "Money demand in the euro area: new insights from disaggregated data," European Economy - Economic Papers 2008 - 2015 373, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    17. Zenon Kontolemis, 2002. "Money Demand in the Euro Area; Where Do We Stand (Today)?," IMF Working Papers 02/185, International Monetary Fund.
    18. Bruggeman, Annick & Donati, Paola & Warne, Anders, 2003. "Is the demand for euro area M3 stable?," Working Paper Series 255, European Central Bank.
    19. Bernanke, Ben S & Blinder, Alan S, 1988. "Credit, Money, and Aggregate Demand," American Economic Review, American Economic Association, pages 435-439.
    20. 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.
    21. Ralph Setzer & Guntram Wolff, 2013. "Money demand in the euro area: new insights from disaggregated data," International Economics and Economic Policy, Springer, pages 297-315.
    22. Mike Artis & Andreas Beyer, 2004. "Issues in Money Demand: The Case of Europe," Journal of Common Market Studies, Wiley Blackwell, vol. 42(4), pages 717-736, November.
    23. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
    24. Christiane Baumeister & Eveline Durinck & Gert Peersman, "undated". "Liquidity, Inflation and Asset Prices in a Time-Varying Framework for the Euro Area," Discussion Papers 08/06, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    25. Bernanke, Ben S & Blinder, Alan S, 1988. "Credit, Money, and Aggregate Demand," American Economic Review, American Economic Association, pages 435-439.
    26. Bierens, Herman J. & Martins, Luis F., 2010. "Time-Varying Cointegration," Econometric Theory, Cambridge University Press, vol. 26(05), pages 1453-1490, October.
    27. Gabe J. De Bondt, 2010. "New Evidence On The Motives For Holding Euro Area Money," Manchester School, University of Manchester, vol. 78(3), pages 259-278, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. De Santis, Roberto A. & Favero, Carlo A. & Roffia, Barbara, 2013. "Euro area money demand and international portfolio allocation: A contribution to assessing risks to price stability," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 377-404.
    2. Ralph Setzer & Guntram Wolff, 2013. "Money demand in the euro area: new insights from disaggregated data," International Economics and Economic Policy, Springer, pages 297-315.
    3. repec:arp:ijefrr:2017:p:54-64 is not listed on IDEAS

    More about this item

    Keywords

    Euro Area Money Demand; Time-Varying Vector Error Correction Model; International Portfolio Allocation; Financial Stability;

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eca:wpaper:2013/57649. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Benoit Pauwels). General contact details of provider: http://edirc.repec.org/data/arulbbe.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.