 La fonction de demande de monnaie pour la zone euro: un r examenSanvi Avouyi-Dovi, M. Brun, A. Dreyfus, Françoise Drumetz, V. Oung and Jean-Guillaume Sahuc Working papers from Banque de France Abstract: In recent years, the dynamics of M3 in the euro area have been driven by two factors: a strong preference for liquidity, observed between 2001 and 2003, followed by a normalisation, at a relatively moderate pace, of portfolio behaviour; as regards the counterparts, changes in M3 and net external assets were of comparable magnitude. These factors highlight the role of national and international portfolio shifts in monetary developments. Furthermore, the traditional specifications of the money demand function sometimes yield unsatisfactory results: instability of short and long-term coefficients, relatively large differences between the estimated and actual value of monetary aggregates, and significant changes in the number of long-run relations. Hence the idea of constructing a money demand function that excludes the external counterpart of M3 or, alternatively, introducing financial asset prices in the demand function of M3, as suggested by Friedman (1988). First, the basic equation, based on the quantitative equation of money, was reestimated in order to verify, for example, whether extending the estimation period or revising certain variables would not result in a major change, notably in terms of the stability of the parameters or the number of structural relations. Indeed, this equation exhibits two instabilities (parameters and the number of long-run relations). Similar results are obtained when the external counterpart of M3 is not taken into account. However, by including European share prices, we obtain a substitution effect (significantly negative coefficient) of this variable and a better adjustment, without affecting the two long-run relations (money demand and the Fisher relation) discussed in the article published in Banque de France Monthly Digest No. 113. So, all other things being equal, a decline in European stock market yields would result in a rise in real money holdings and a decrease in the velocity of circulation of money. Equity market developments therefore appear to be a significant explanatory factor for the dynamics of M3 in the euro area. Lastly, estimates of the real money gap, based on the money demand equation factoring in the substitution effect associated with European stock price developments, point to moderate but persistent excess liquidity in the euro area. Keywords: Money demand; M3 own rate; Wealth effect; Substitution effect. (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:142 Access Statistics for this paper More papers in Working papers from Banque de France Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS. Contact information at EDIRC. |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.