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

Working papers from Faculty of Business and Economics - University of Basel

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 °exible price model with stable money demand, rational expectations, and an exogenous income-money ratio which follows a Markov trend. This framework, which implies an in°uence of expected future money on prices, leads to a cointe- grating 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 coin- tegration 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)
Date: 2005-07-01
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Related works:
Working Paper: Expected Money Growth, Markov Trends and the Instability of Money Demand in the Euro Area (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:bsl:wpaper:2005/07

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