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Stock market downswing and the stability of European monetary union money demand

  • Carstensen, Kai

This article analyzes the question whether money demand in the euro area underwent a structural change in the end of 2001 when M3 money growth started to considerably overshoot the reference value set by the European Central Bank. It is found that conventional specifications of money demand have in fact become unstable, whereas specifications that are augmented with equity returns and volatility remain stable. Using such an augmented specification, it turns out that the high M3 growth rates have not led to excess liquidity and thus do not pose a measurable threat to price stability.

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Paper provided by University of Munich, Department of Economics in its series Munich Reprints in Economics with number 19940.

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Date of creation: 2006
Date of revision:
Publication status: Published in Journal of Business and Economic Statistics 4 24(2006): pp. 395-402
Handle: RePEc:lmu:muenar:19940
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