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Euro area money demand: empirical evidence on the role of equity and labour markets

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  • de Bondt, Gabe

Abstract

This study presents empirical evidence on the long-run motives for holding euro area money by focusing on the role of equity and labour markets. Equity positively affects money demand through wealth effects, as equities are a significant store of household wealth and thus part of a financial transaction motive. Negative substitution effects through the expected return on equity reflect a speculative motive from the equity market. A precautionary motive from the labour market is captured by the annual change in the unemployment rate. The main conclusion is that equity and labour markets do matter for money. All three new elements, in particular housing and financial wealth, have been found statistically and economically significant in explaining M3 since 1983. These findings are robust across different proxies for the augmented motives and a shorter sample period starting in 1994. JEL Classification: E41, G11, C32

Suggested Citation

  • de Bondt, Gabe, 2009. "Euro area money demand: empirical evidence on the role of equity and labour markets," Working Paper Series 1086, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20091086
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    Cited by:

    1. Franz Seitz & Julian von Landesberger, 2014. "Household Money Holdings in the Euro Area: An Explorative Investigation," Journal of Banking and Financial Economics, University of Warsaw, Faculty of Management, vol. 2(2), pages 83-115, November.
    2. Beyer, Andreas, 2009. "A Stable Model for Euro Area Money Demand: Revisiting the Role of Wealth," Working Paper Series 1111, European Central Bank.
    3. El-Shagi, Makram & Giesen, Sebastian, 2013. "Money and inflation: Consequences of the recent monetary policy," Journal of Policy Modeling, Elsevier, vol. 35(4), pages 520-537.
    4. Helmi Hamdi & Ali Said & Rashid Sbia, 2015. "Empirical Evidence on the Long-Run Money Demand Function in the Gulf Cooperation Council Countries," International Journal of Economics and Financial Issues, Econjournals, vol. 5(2), pages 603-612.
    5. Setzer, Ralph & van den Noord, Paul & Wolff, Guntram B., 2011. "Heterogeneity in money holdings across euro area countries: The role of housing," European Journal of Political Economy, Elsevier, vol. 27(4), pages 764-780.
    6. Frauke Dobnik, 2013. "Long-run money demand in OECD countries: what role do common factors play?," Empirical Economics, Springer, vol. 45(1), pages 89-113, August.
    7. Frauke Dobnik, 2011. "OLong-run Money Demand in OECD Countries – Cross-Member Cointegration," Ruhr Economic Papers 0237, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    8. Franz Seitz & Julian von Landesberger, 2012. "Household Money Demand: The Euro Area Case," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 148(III), pages 409-438, September.
    9. Pasquale Foresti & Oreste Napolitano, 2013. "Modelling long-run money demand: a panel data analysis on nine developed economies," Applied Financial Economics, Taylor & Francis Journals, vol. 23(22), pages 1707-1719, November.
    10. Dobnik, Frauke, 2011. "Long-run Money Demand in OECD Countries – Cross-Member Cointegration," Ruhr Economic Papers 237, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    11. Rakesh Bissoondeeal & Michail Karoglou & Andy Mullineux, 2014. "Breaks in the UK Household Sector Money Demand Function," Manchester School, University of Manchester, vol. 82, pages 47-68, December.
    12. repec:zbw:rwirep:0237 is not listed on IDEAS

    More about this item

    Keywords

    equity return; Euro area money demand; precautionary motive; wealth;

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • 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

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