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Is European Money Demand Still Stable?

  • Kai Carstensen

This paper analyzes the question whether money demand in the Euro area has undergone a structural change in the recent time when M3 money growth has considerably overshot the reference value set by the European Central Bank (ECB). It is found that conventional specifications of money demand have in fact become unstable while specifications which are augmented with equity yields and volatility remain stable. Using such an augmented specification, it turns out that the excessive M3 growth rates can largely be attributed to the stock market downswing and do not put a measurable threat to price stability.

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File URL: https://www.ifw-members.ifw-kiel.de/publications/is-european-money-demand-still-stable/kap1179.pdf
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Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1179.

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Length: 32 pages
Date of creation: Aug 2003
Date of revision:
Handle: RePEc:kie:kieliw:1179
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  1. Coenen, Günter & Vega, Juan Luis, 1999. "The demand for M3 in the euro area," Working Paper Series 0006, European Central Bank.
  2. Donald W.K. Andrews, 2002. "End-of-Sample Instability Tests," Cowles Foundation Discussion Papers 1369, Cowles Foundation for Research in Economics, Yale University.
  3. 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.
  4. Henrik Hansen & Søren Johansen, 1999. "Some tests for parameter constancy in cointegrated VAR-models," Econometrics Journal, Royal Economic Society, vol. 2(2), pages 306-333.
  5. Ploberger, Werner & Kramer, Walter & Kontrus, Karl, 1989. "A new test for structural stability in the linear regression model," Journal of Econometrics, Elsevier, vol. 40(2), pages 307-318, February.
  6. Elliott, Graham, 1999. "Efficient Tests for a Unit Root When the Initial Observation Is Drawn from Its Unconditional Distribution," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(3), pages 767-83, August.
  7. James H. Stock & Mark W. Watson, 1991. "A simple estimator of cointegrating vectors in higher order integrated systems," Working Paper Series, Macroeconomic Issues 91-3, Federal Reserve Bank of Chicago.
  8. Ansgar Belke & Wim Kösters & Martin Leschke & Thorsten Polleit, 2004. "Liquidity on the Rise - Too Much Money Chasing Too Few Goods," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 237/2004, Department of Economics, University of Hohenheim, Germany.
  9. Peter C.B. Phillips & Bruce E. Hansen, 1988. "Statistical Inference in Instrumental Variables," Cowles Foundation Discussion Papers 869R, Cowles Foundation for Research in Economics, Yale University, revised Apr 1989.
  10. Friedman, Milton, 1988. "Money and the Stock Market," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 221-45, April.
  11. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  12. Hansen, Bruce E., 1992. "Testing for parameter instability in linear models," Journal of Policy Modeling, Elsevier, vol. 14(4), pages 517-533, August.
  13. Lütkepohl, Helmut & Wolters, Jürgen, 2001. "The transmission of German monetary policy in the pre-Euro period," SFB 373 Discussion Papers 2001,87, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  14. Zenon Kontolemis G., 2002. "Money Demand in the Euro Area; Where Do We Stand (Today)?," IMF Working Papers 02/185, International Monetary Fund.
  15. Funke, Michael, 2001. "Money demand in Euroland," Journal of International Money and Finance, Elsevier, vol. 20(5), pages 701-713, October.
  16. Massimo Caruso, 2001. "Stock prices and money velocity: a multi-country analysis," Empirical Economics, Springer, vol. 26(4), pages 651-672.
  17. Donald Andrews & Jae-Young Kim, 2004. "End-of-Sample Conintegratio Breakdown Tests," Econometric Society 2004 Far Eastern Meetings 795, Econometric Society.
  18. Claus Brand & Dieter Gerdesmeier & Barbara Roffia, 2002. "Estimating the trend of M3 income velocity underlying the reference value for monetary growth," Occasional Paper Series 03, European Central Bank.
  19. Bruggeman, Annick, 2000. "The Stability of EMU-Wide Money Demand Functions and the Monetary Policy Strategy of the European Central Bank," Manchester School, University of Manchester, vol. 68(2), pages 184-202, March.
  20. Brand, Claus & Cassola, Nuno, 2000. "A money demand system for euro area M3," Working Paper Series 0039, European Central Bank.
  21. Hansen, Bruce E, 1992. "Tests for Parameter Instability in Regressions with I(1) Processes," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 321-35, July.
  22. 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.
  23. Warne, Anders & Bruggeman, Annick & Donati, Paola, 2003. "Is the demand for euro area M3 stable?," Working Paper Series 0255, European Central Bank.
  24. L Tkepohl, Helmut & Wolters, J Rgen, 2003. "Transmission Of German Monetary Policy In The Pre-Euro Period," Macroeconomic Dynamics, Cambridge University Press, vol. 7(05), pages 711-733, November.
  25. Ansgar Belke & Wim Kösters & Martin Leschke & Thorsten Polleit, 2003. "Challenges to ECB Credibility," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 225/2003, Department of Economics, University of Hohenheim, Germany.
  26. Choudhry, Taufiq, 1996. "Real stock prices and the long-run money demand function: evidence from Canada and the USA," Journal of International Money and Finance, Elsevier, vol. 15(1), pages 1-17, February.
  27. Clausen , Volker & Kim, Jeong-Ryeol, 2000. "The Long-Run Stability of European Money Demand," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 15, pages 486-505.
  28. repec:cup:macdyn:v:7:y:2003:i:5:p:711-33 is not listed on IDEAS
  29. 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.
  30. Phillips, Peter C B & Hansen, Bruce E, 1990. "Statistical Inference in Instrumental Variables Regression with I(1) Processes," Review of Economic Studies, Wiley Blackwell, vol. 57(1), pages 99-125, January.
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