On the stability of euro area money demand and its implications for monetary policy
LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library
On the Stability of Euro Area Money Demandand its Implications for Monetary PolicyFebruary 27, 2018AbstractWe employ a recent time-varying cointegration test to revisit the usefulness of long-runmoney demand equations for the ECB, addressing the issue of their instability by meansof a model evaluation exercise. Building on the results, we make a twofold contribution.First, we propose a novel stable money demand equation relying on two crucial factors:a speculative motive, represented by domestic and foreign price-earnings ratios, and aprecautionary motive, measured by changes in unemployment. Second, we use the modelto derive relevant policy implications for the ECB, since excess liquidity looks more usefulfor forecasting stock market busts than future inflation. Overall, this evidence pointsto (i) a possible evolution of the monetary pillar in the direction of pursuing financialstability and (ii) the exclusion of a sudden liquidity–driven inflationary burst after theexit from the prolonged period of unconventional monetary measures.
Keywords: money demand; time-varying cointegration; monetary policy; financial stabil-ity; price stability (search for similar items in EconPapers)
JEL-codes: C32 E41 E52 (search for similar items in EconPapers)
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Published in Oxford Bulletin of Economics and Statistics, 1, August, 2018, 80(4), pp. 755-787. ISSN: 0305-9049
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Journal Article: On the Stability of Euro Area Money Demand and Its Implications for Monetary Policy (2018)
Working Paper: On the Stability of Euro Area Money Demand and its Implications for Monetary Policy (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:87283
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