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Is the euro area M3 abandoning us?

  • Nuno Alves
  • Carlos Robalo Marques
  • João Sousa

This paper reassesses the role of the M3 aggregate for monetary policy purposes in the euro area. Using data until 2006Q4 it is shown that the M3 aggregate ceased to display the empirical properties that supported its prominent role in the ECB’s monetary policy strategy. On the one hand, when the most recent data are used in the analysis there is strong evidence of cointegration breakdown in the M3 money demand models as well as in the "two-pillar Phillips curves" with filtered data. On the other hand, the leading indicator properties of M3 for inflation in the area have also deteriorated markedly in the most recent years. This is supported by evidence both in the time and frequency domains.

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Paper provided by Banco de Portugal, Economics and Research Department in its series Working Papers with number w200720.

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Date of creation: 2007
Date of revision:
Handle: RePEc:ptu:wpaper:w200720
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  1. José Ferreira Machado & João Sousa, 2006. "Identifying asset price booms and busts with quantile regressions," Working Papers w200608, Banco de Portugal, Economics and Research Department.
  2. Gunter Coenen & Andrew T. Levin & Volker W. Wieland, 2001. "Data uncertainty and the role of money as an information variable for monetary policy," Finance and Economics Discussion Series 2001-54, Board of Governors of the Federal Reserve System (U.S.).
  3. Christian Dreger & Jürgen Wolters, 2006. "Investigating M3 Money Demand in the Euro Area: New Evidence Based on Standard Models," Discussion Papers of DIW Berlin 561, DIW Berlin, German Institute for Economic Research.
  4. 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.
  5. Carlos Robalo Marques & Nuno Alves & João Sousa, 2006. "Some Issues Concerning the Use of M3 for Monetary Policy Analysis in the Euro Area," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
  6. Assenmacher-Wesche, Katrin & Gerlach, Stefan, 2006. "Interpreting Euro Area Inflation at High and Low Frequencies," CEPR Discussion Papers 5632, C.E.P.R. Discussion Papers.
  7. Coenen, Günter & Vega, Juan Luis, 1999. "The demand for M3 in the euro area," Working Paper Series 0006, European Central Bank.
  8. Kai Carstensen, 2003. "Is European Money Demand Still Stable?," Kiel Working Papers 1179, Kiel Institute for the World Economy.
  9. Michael Dotsey & Carl D. Lantz & Lawrence Santucci, 2000. "Is money useful in the conduct of monetary policy?," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 23-48.
  10. Daniel Levy, 2002. "Cointegration in Frequency Domain," Emory Economics 0209, Department of Economics, Emory University (Atlanta).
  11. Warne, Anders & Bruggeman, Annick & Donati, Paola, 2003. "Is the demand for euro area M3 stable?," Working Paper Series 0255, European Central Bank.
  12. Dotsey, Michael & Hornstein, Andreas, 2003. "Should a monetary policymaker look at money?," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 547-579, April.
  13. Assenmacher-Wesche, Katrin & Gerlach, Stefan, 2006. "Understanding the Link between Money Growth and Inflation in the Euro Area," CEPR Discussion Papers 5683, C.E.P.R. Discussion Papers.
  14. Bruggeman, Annick & Camba-Méndez, Gonzalo & Fischer, Björn & Sousa, João, 2005. "Structural filters for monetary analysis: the inflationary movements of money in the euro area," Working Paper Series 0470, European Central Bank.
  15. Trecroci, Carmine & Vega, Juan Luis, 2000. "The information content of M3 for future inflation," Working Paper Series 0033, European Central Bank.
  16. Calza, Alessandro & Sousa, João, 2003. "Why has broad money demand been more stable in the euro area than in other economies? A literature review," Working Paper Series 0261, European Central Bank.
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