On the stability of euro area money demand and its implications for monetary policy

Matteo Barigozzi

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: On the Stability of Euro Area Money Demandand its Implications for Monetary PolicyFebruary 27, 2018AbstractWe employ a recent time-varying cointegration test to revisit the usefulness of long-runmoney demand equations for the ECB, addressing the issue of their instability by meansof a model evaluation exercise. Building on the results, we make a twofold contribution.First, we propose a novel stable money demand equation relying on two crucial factors:a speculative motive, represented by domestic and foreign price-earnings ratios, and aprecautionary motive, measured by changes in unemployment. Second, we use the modelto derive relevant policy implications for the ECB, since excess liquidity looks more usefulfor forecasting stock market busts than future inflation. Overall, this evidence pointsto (i) a possible evolution of the monetary pillar in the direction of pursuing financialstability and (ii) the exclusion of a sudden liquidity–driven inflationary burst after theexit from the prolonged period of unconventional monetary measures.

Keywords: money demand; time-varying cointegration; monetary policy; financial stabil-ity; price stability (search for similar items in EconPapers)
JEL-codes: C32 E41 E52 (search for similar items in EconPapers)
Date: 2018-08-01
New Economics Papers: this item is included in nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Published in Oxford Bulletin of Economics and Statistics, 1, August, 2018, 80(4), pp. 755-787. ISSN: 0305-9049

Downloads: (external link)
http://eprints.lse.ac.uk/87283/ Open access version. (application/pdf)

Related works:
Journal Article: On the Stability of Euro Area Money Demand and Its Implications for Monetary Policy (2018)
Working Paper: On the Stability of Euro Area Money Demand and its Implications for Monetary Policy (2013)
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:ehl:lserod:87283

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().