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Money Demand in the Euro Area; Where Do We Stand (Today)?

  • Zenon Kontolemis G.

The paper reviews the stability of long-run money demand in the euro area in the light of recent revisions to M3 data. The analysis confirms the existence of a stable long-run money demand, although the estimated equation implies a smaller equilibrium M3 growth than the European Central Bank's reference value of 4½ percent. The stability of long-run money demand does not imply that the market is always in equilibrium. Indeed, it is argued that periods of disequilibrium can be long and adjustment slow. The paper shows that the difference between the low estimated equilibrium growth rate and the actual growth rate for M3 can be explained by a velocity shock, identified here as the sharp fall in equity prices in the last two years. These characteristics of the money market-summarized in the events of the last two years-would call for an alternative approach in the communication of monetary policy developments, essentially putting less emphasis on month-to-month developments in M3.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 02/185.

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Length: 30
Date of creation: 01 Nov 2002
Date of revision:
Handle: RePEc:imf:imfwpa:02/185
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  1. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  2. Gunter Coenen & Juan Luis Vega, 2000. "The Demand for M3 in the Euro Area," Econometric Society World Congress 2000 Contributed Papers 0976, Econometric Society.
  3. Monticelli, Carlo & Strauss-Kahn, Marc-Olivier, 1993. "European Integration and the Demand for Broad Money," The Manchester School of Economic & Social Studies, University of Manchester, vol. 61(4), pages 345-66, December.
  4. Davidson, James E H, et al, 1978. "Econometric Modelling of the Aggregate Time-Series Relationship between Consumers' Expenditure and Income in the United Kingdom," Economic Journal, Royal Economic Society, vol. 88(352), pages 661-92, December.
  5. M.F. Bryan & S.G. Cecchetti & R. O'Sullivan, 2001. "Asset Prices in the Measurement of Inflation," DNB Staff Reports (discontinued) 62, Netherlands Central Bank.
  6. Cassola, Nuno & Morana, Claudio, 2004. "Monetary policy and the stock market in the euro area," Journal of Policy Modeling, Elsevier, vol. 26(3), pages 387-399, April.
  7. Brand, Claus & Cassola, Nuno, 2000. "A money demand system for euro area M3," Working Paper Series 0039, European Central Bank.
  8. 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.
  9. Svensson, Lars, 2000. "The first Year of the Eurosystem: Inflation Targeting or Not?," Seminar Papers 681, Stockholm University, Institute for International Economic Studies.
  10. Artis, Michael J & Kontolemis, Zenon G & Mizen, Paul D, 1998. "Inflation Targeting: What can the ECB Learn from the Recent Experience of the Bank of England," CEPR Discussion Papers 1941, C.E.P.R. Discussion Papers.
  11. Benedict J. Clements & Zenon Kontolemis G. & Joaquim Vieira Ferreira Levy, 2001. "Monetary Policy Under EMU Differences in the Transition Mechanism?," IMF Working Papers 01/102, International Monetary Fund.
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