M3 Money Demand and Excess Liquidity in the Euro Area

Christian Dreger and Juergen Wolters

No 795, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: Money growth in the euro area has exceeded its target since 2001. Likewise, recent empirical studies did not find evidence in favour of a stable long run money demand function. The equation appears to be increasingly unstable if more recent data are used. If the link between money balances and the macroeconomy is fragile, the rationale of monetary aggregates in the ECB strategy has to be doubted. In contrast to the bulk of the literature, we are able to identify a stable long run money demand relationship for M3 with reasonable long run behaviour. This finding is robust for different (ML and S2S) estimation methods. To obtain the result, the short run homogeneity restriction between money and prices is relaxed. In addition, a rise in the income elasticity after 2001 is taken into account. The break might be linked to the introduction of euro coins and banknotes. The monetary overhang and the real money gap do not indicate significant inflation pressures. The corresponding error correction model survives a battery of specification tests.

Keywords: Cointegration analysis; error correction; excess liquidity; money demand; monetary policy (search for similar items in EconPapers)
JEL-codes: C22 C52 E41 (search for similar items in EconPapers)
Pages: 24 p.
Date: 2008
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
https://www.diw.de/documents/publikationen/73/diw_01.c.84154.de/dp795.pdf (application/pdf)

Related works:
Journal Article: M3 money demand and excess liquidity in the euro area (2010)
Journal Article: M3 Money Demand and Excess Liquidity in the Euro Area (2010)
Working Paper: M3 Money Demand and Excess Liquidity in the Euro Area (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:diw:diwwpp:dp795

Access Statistics for this paper

More papers in Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research Contact information at EDIRC.
Bibliographic data for series maintained by Bibliothek ().