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The money demand function for the Euro area: one step beyond

  • Sanvi Avouyi-Dovi

    (Banque de France)

  • Françoise Drumetz

    (Banque de France)

  • Jean-Guillaume Sahuc

    ()

    (Banque de France)

This article sets out to re-examine the money demand function for the euro area. Traditional specifications often yield unsatisfactory results: instability of short and long-term coefficients; relatively large differences between estimated and actual value of variables; and significant changes in the number of long-term relationships, etc. Using a standard Vector Error Correction Model, we find that the usual specification is indeed unstable. However, introducing an European equity price gives rise to a more stable system. Furthermore, recursive estimates confirm the relative stability of long-term coefficients. Estimates of the real money gap, based on the money demand equation including equity prices, point to moderate, albeit persistent, excess liquidity in the euro area in the recent years. The real money gap contains information about future inflation but this content may have diminished since 2001.

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File URL: http://epee.univ-evry.fr/RePEc/2007/07-08.pdf
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Paper provided by Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne in its series Documents de recherche with number 07-08.

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Length: 33 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:eve:wpaper:07-08
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  1. Stracca, Livio, 2001. "The functional form of the demand for euro area M1," Working Paper Series 0051, European Central Bank.
  2. Luca Dedola & Eugenio Gaiotti & Luca Silipo, 2001. "Money demand in the euro area: do national differences matter?," Temi di discussione (Economic working papers) 405, Bank of Italy, Economic Research and International Relations Area.
  3. Sunil Sharma & Neil R. Ericsson, 1996. "Broad Money Demand and Financial Liberalization in Greece," IMF Working Papers 96/62, International Monetary Fund.
  4. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
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  7. Carstensen, Kai, 2006. "Stock market downswing and the stability of European monetary union money demand," Munich Reprints in Economics 19940, University of Munich, Department of Economics.
  8. Alfred A. Haug & Julie Tam, 2001. "A Closer Look at Long Run Money Demand," Working Papers 2002_09, York University, Department of Economics, revised Sep 2002.
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  10. Friedman, Milton, 1988. "Money and the Stock Market," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 221-45, April.
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  12. Gunter Coenen & Juan Luis Vega, 2000. "The Demand for M3 in the Euro Area," Econometric Society World Congress 2000 Contributed Papers 0976, Econometric Society.
  13. Peter N. Ireland, 1992. "Endogenous financial innovation and the demand for money," Working Paper 92-03, Federal Reserve Bank of Richmond.
  14. Warne, Anders & Bruggeman, Annick & Donati, Paola, 2003. "Is the demand for euro area M3 stable?," Working Paper Series 0255, European Central Bank.
  15. Ball, Laurence, 2001. "Another look at long-run money demand," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 31-44, February.
  16. Pesaran, M.H. & Smith, R., 1992. "Estimating Long-Run Relationships From Dynamic Heterogeneous Panels," Cambridge Working Papers in Economics 9215, Faculty of Economics, University of Cambridge.
  17. Zenon Kontolemis G., 2002. "Money Demand in the Euro Area: Where Do We Stand (Today)?," IMF Working Papers 02/185, International Monetary Fund.
  18. Yoshihisa Baba & David F. Hendry & Ross M. Starr, 1992. "The Demand for M1 in the U.S.A., 1960–1988," Review of Economic Studies, Oxford University Press, vol. 59(1), pages 25-61.
  19. Claus Brand & Nuno Cassola, 2004. "A money demand system for euro area M3," Applied Economics, Taylor & Francis Journals, vol. 36(8), pages 817-838.
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