The impact of uncertainty on money demand in the UK, US and Euro area

Rakesh K. Bissoondeeal, Jane M. Binner and Michail Karoglou

The European Journal of Finance, 2023, vol. 29, issue 16, 1866-1884

Abstract: We estimate money demand functions for the UK, the Euro area and the US using Divisia monetary aggregates and investigate the extent to which the uncertainty caused by Brexit and Covid have affected these relationships. Our cointegrated VAR analysis shows that for all three economies Brexit and/or Covid have had some impact on the stability of money demand functions. We find that including a measure of stock market volatility in the money demand specifications helps re-establish stability of the models, particularly for the UK and the Euro area. We also explore the uncertainty and money demand relationship in the context of a Markov-switching model. We find that the effect of uncertainty on the demand for money is more pronounced during periods of heightened uncertainty. The findings of this study lend support to studies calling for Divisia aggregates to be given a more prominent role in policymaking, especially when interest rates are in the zero lower bound environment and are less informative about the stance of monetary policy.

Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:taf:eurjfi:v:29:y:2023:i:16:p:1866-1884

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DOI: 10.1080/1351847X.2023.2204194

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