Expected Money Growth, Markov Trends and the Instability of Money Demand in the Euro Area

Sylvia Kaufmann and Peter Kugler ()
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Peter Kugler: University of Basel, WWZ, Petersgraben 51, CH-4003 Basel

Working Papers from Oesterreichische Nationalbank (Austrian Central Bank)

Abstract: This paper analyzes the recently documented instability of money demand in the euro area in the framework of a Markov switching trend model. First, we consider a standard flexible price model with stable money demand, rational expectations, and an exogenous income-money ratio which follows a Markov trend. This framework, which implies an influence of expected future money on prices, leads to a cointegrating relationship between (log) prices and the (log of the) money-income ratio with a switching intercept term. Of course, this likely leads to a rejection of cointegration by standard tests and to the erroneous conclusion of an unstable money demand. Second, a more general model allowing for endogeneity and more general dynamics is estimated with Bayesian methods for euro area data from 1975-2003. This exercise provides support for our model and a stable demand for M3 in the euro area.

Keywords: Bayesian cointegration analysis; Markov trend; Markov chain Monte Carlo; money demand. (search for similar items in EconPapers)
JEL-codes: C11 C32 E41 (search for similar items in EconPapers)
Pages: 24
Date: 2006-09-15
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Expected Money Growth, Markov Trends and the Instability of Money Demand in the Euro Area (2005)
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