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Euro Area Money Demand; Measuring the Opportunity Costs Appropriately

Author

Listed:
  • Joaquim Vieira Ferreira Levy
  • Alessandro Calza
  • Dieter Gerdesmeier

Abstract

The existence of a well-specified and stable relationship between money and prices has long been perceived as a prerequisite for the use of monetary aggregates in the conduct of monetary policy. This paper contributes to the ongoing discussion about the stability of euro area money demand by constructing an own rate of return on euro area M3 and by analyzing its implications in a standard money demand system. Over the sample period, one cointegrating vector relating real M3, real GDP and the spread between the short-term interest rate and the own rate of M3 can be identified and interpreted as a long-run euro area money demand equation. A dynamic money demand system is subsequently estimated. Standard diagnostics stability tests and out-of-sample forecasts confirm the good statistical performance of the model.

Suggested Citation

  • 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.
  • Handle: RePEc:imf:imfwpa:01/179
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    References listed on IDEAS

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    3. Peter C. B. Phillips & Bruce E. Hansen, 1990. "Statistical Inference in Instrumental Variables Regression with I(1) Processes," Review of Economic Studies, Oxford University Press, vol. 57(1), pages 99-125.
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    More about this item

    Keywords

    Demand for money; Euro Area; European Economic and Monetary Union; European Monetary Union; Money demand; own rate of money; M3; cointegration; equation; statistics; significance level; Multiple or Simultaneous Equation Models: Time-Series Models;

    JEL classification:

    • M3 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising

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