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On the Stability of Euro Area Money Demand and its Implications for Monetary Policy

Matteo Barigozzi and Antonio Conti ()

LEM Papers Series from Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy

Abstract: We revisit the usefulness of long-run money demand equations for the European Central Bank. We first conduct a model evaluation exercise by means of a recent timeóvarying cointegration test. A stable relation for euro area M3 is not rejected by data only when accounting for both a speculative motive, represented by international financial markets, and a precautionary motive, proxied by changes in the unemployment rate. Second, relying on this finding, we propose and estimate a novel time-invariant specification for money demand which allows us (i) to build a leading indicator of stock market busts and (ii) to describe the anomalous behavior of M3 in the last decade. Excess liquidity matters for both financial and price stability.

Keywords: money demand; time-varying cointegration; priceóearnings ratios; unemployment rate; monetary policy (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-eec and nep-mon
Date: 2013-04-23
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Journal Article: On the Stability of Euro Area Money Demand and Its Implications for Monetary Policy (2018) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:ssa:lemwps:2013/11

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