International currency substitution and the demand for money in the euro area

Miguel de Freitas ()

Economic Modelling, 2022, vol. 117, issue C

Abstract: Using quarterly data for the period from 1983:Q1 until 2019:Q4, we identify a stable money demand relationship for the euro area M3, with the US long-term interest rate as a regressor, together with the domestic interest rate and income. This specification is consistent with the open economy liquidity services approach to money demand, in light of which the ownership of money is separate from portfolio decisions. Our results suggest international currency substitution, pointing to interdependency of monetary policies, even in a context of floating exchange rates. In the short-run analysis, we find that excess liquidity helps predict nominal money but not the price level. In general, our findings cast doubt on the usefulness of the information content of M3 to analyse prospective inflation in the euro area.

Keywords: Euro area; Money demand; Capital flows; Portfolio theory; International currency substitution (search for similar items in EconPapers)
JEL-codes: E41 F41 F42 G11 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:117:y:2022:i:c:s0264999322003017

DOI: 10.1016/j.econmod.2022.106064

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