On the empirical relevance of the Lucas critique: the case of euro area money demand

Christian Dreger and Juergen Wolters

Empirica, 2016, vol. 43, issue 1, 82 pages

Abstract: This paper examines the relevance of the Lucas critique for euro area money demand. Based on the money in the utility function approach, a vector error correction model is specified to investigate the relationship between money and inflation in times of policy shifts. A well defined equation for money demand is obtained. The results indicate that the evolution of M3 is still in line with money demand. In the long run, inflation is affected by asset prices and detrended output. Our results show that the Lucas critique can be refuted in case of euro area money demand for the period of quantitative easing. Thus, the estimated money demand equation provides reliable information for the conduct of future monetary policy. Copyright Springer Science+Business Media New York 2016

Keywords: Lucas critique; Money demand; Superexogeneity; C22; C52; E41 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1007/s10663-015-9289-z

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