Money Demand in the Euro Area: Where Do We Stand (Today)?

November 1, 2002

Preview Citation

Format: Chicago

Zenon Kontolemis. Money Demand in the Euro Area: Where Do We Stand (Today)?, (USA: International Monetary Fund, 2002) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The paper reviews the stability of long-run money demand in the euro area in the light of recent revisions to M3 data. The analysis confirms the existence of a stable long-run money demand, although the estimated equation implies a smaller equilibrium M3 growth than the European Central Bank's reference value of 4½ percent. The stability of long-run money demand does not imply that the market is always in equilibrium. Indeed, it is argued that periods of disequilibrium can be long and adjustment slow. The paper shows that the difference between the low estimated equilibrium growth rate and the actual growth rate for M3 can be explained by a velocity shock, identified here as the sharp fall in equity prices in the last two years. These characteristics of the money market-summarized in the events of the last two years-would call for an alternative approach in the communication of monetary policy developments, essentially putting less emphasis on month-to-month developments in M3.

Subject: Asset prices, Demand for money, Financial markets, Inflation, Money, Money markets, Personal income, Price stabilization, Prices

Keywords: Adjustment terms, Asset prices, Cointegration, Demand for money, EMU, Europe, Inflation, Monetary Policy, Money Demand, Money demand equation, Money demand function, Money market, Money markets, Price stabilization, Reference value, Taylor Rule, Velocity trend, WP

Publication Details

Pages:

30
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2002/185
Stock No:

WPIEA1852002
ISBN:

9781451859423
ISSN:

1018-5941

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