A Monthly Monetary Model with Banking Intermediation for the Euro Area

Annick Bruggeman and Marie Donnay

Working Papers of Department of Economics, Leuven from KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven

Abstract: In this paper we gradually construct a monthly encompassing monetary model on the basis of its two constituting components: a money demand and a loan demand model. Each of the three models pays special attention to the intermediation role of banks by modelling the relation between the retail bank interest rates and the short-term market interest rate. The encompassing monetary model accounts for the possible interactions between money and loans induced by the intermediation role of the banking sector, which is represented in this paper by its interest rates setting behaviour. Our analysis indicates that, over the period January 1981-September 2001, our monthly money demand model corroborates the existing quarterly evidence. The same does not hold for our loan demand model where a correcting variable for the mergers and acquisitions wave of 1999-2000 is added as an exogenous variable to stabilise the loan demand equation. Our encompassing monetary model rejects the frequently used assumption of complete separability in the pricing of loans and deposits. It provides also some evidence on the existence of a bank lending channel in the euro area, although there is some indication of a possible instability in the link between money and loans towards the end of the sample period. The estimation of the Structural-VECM highlights very rich dynamics in the system. The common trends method results in the identification of seven shocks: an aggregate supply shock, an inflation objective shock, an institutional shock, a money demand shock, a loan demand shock, a banking shock and a monetary policy instrument shock. The first three shocks are permanent shocks, responsible for the main variability in the macro-economic variables in the long run; while the last four shocks are temporary ones, affecting the economy only in the short and medium run.

Keywords: Euro area; Cointegration; Structural VECM; Money demand; Loan demand; Banking intermediation. (search for similar items in EconPapers)
JEL-codes: C32 E41 E43 E50 G21 (search for similar items in EconPapers)
Date: 2003-03
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: Add references at CitEc
Citations:

Downloads: (external link)
https://lirias.kuleuven.be/bitstream/123456789/121565/1/Dps0309.pdf

Related works:
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:ete:ceswps:ces0309

Access Statistics for this paper

More papers in Working Papers of Department of Economics, Leuven from KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven
Bibliographic data for series maintained by library EBIB ().