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On the Sources of Euro Area Money Demand Stability. A Time-Varying Cointegration Analysis

Matteo Barigozzi and Antonio Conti ()

No ECARES 2010-022, Working Papers ECARES from ULB -- Universite Libre de Bruxelles

Abstract: We adopt a time-varying cointegration test to discriminate among different empirical studies claiming to find a stable Euro Area money demand equation. A time invariant relation explaining real balances is rejected by data, even when accounting for housing, financial and labour markets. Conversely, an international portfolio allocation approach provides stabilization. In particular, international financial markets, rather than monetary policy, are the key determinant of the observed diverging path of money growth. In terms of policy, we provide empirical support for a New Two Pillars Strategy aimed to achieve financial stability through money and credit and price stability through interest rates.

Keywords: Euro Area Money Demand; Time-Varying Vector Error Correction Model; International Portfolio Allocation; Financial Stability (search for similar items in EconPapers)
JEL-codes: E41 E44 C32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
Date: 2010
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