Money demand and monetary policy in Europe

Clausen, Volker

doi:10.1007/bf02773294

Cited by 13 publications

(8 citation statements)

References 15 publications

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“…This provides an additional rationale for modelling the demand for M1 in the euro area, and in particular for investigating its functional form. 2 1 Relatively recent papers estimating an M1 demand equation in the EU or in the euro area include Falk and Funke (1995), Monticelli and Papi (1996), Fagan and Henry (1998), Clausen (1998), Bruggeman (2000) and Funke (2001). 2 Bruggeman (2000), in evaluating the properties of different monetary aggregates for the euro area, held the view that M1 scored best in three out of six criteria (namely, measure of liquidity, controllability and definitional consistency).…”

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confidence: 99%

“…2 Bruggeman (2000), in evaluating the properties of different monetary aggregates for the euro area, held the view that M1 scored best in three out of six criteria (namely, measure of liquidity, controllability and definitional consistency). Clausen (1998) even argued in favour of a monetary policy strategy by the ECB focused on M1. On the other hand, according to Bruggeman (2000), a main drawback of M1 lies in its instability, due to possible portfolio shifts.…”

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confidence: 99%

“…This apparently stands in contrast with the findings especially of Hoffman and Rasche (1996), Fagan and Henry (1998) and Bruggeman (2000) that the demand for M1 in the euro area (or close proxies thereof) is stable up to the mid nineties. 3 It also suggests that 7 Falk and Funke (1995), Monticelli and Papi (1996), Fagan and Henry (1998), Clausen (1998) andBruggeman (2000). 2 It may also be remarked that Bruggeman (2000) something new -and worth investigating -has happened in the second part of the decade.…”

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confidence: 99%

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The Functional Form Of The Demand For Euro Area M1

Stracca

2003

The Manchester School

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A remarkable development seen in recent years is the pronounced decline in euro area M1 velocity vis–à–vis a moderate decline in short–term interest rates, which represent the most natural opportunity cost for M1, suggesting an increase in the interest rate elasticity of M1 demand. In fact, estimating a theoretically plausible and stable demand function for M1 in the euro area is possible if a functional form of money demand allowing for an interest rate elasticity decreasing in size with the level of the interest rate is imposed. This finding would apparently suggest that the decline in inflation and nominal interest rates in Europe experienced in the run–up to the euro should have ‘naturally’ brought about an increased degree of preference for liquidity without any fundamental change in agents’ preferences. To test the validity of this conclusion, a time–varying parameters model is estimated through a Kalman filter on the level of real M1, which is able to test simultaneously the stability of the parameters and the functional form of the demand for euro area M1. In this case, results clearly suggest the double–log function to be very close to the true ‘deep’ functional form of M1 demand in the euro area, consistent with the findings of Chadha, Haldane and Janssen for the UK and of Lucas for the USA. At the same time, there is evidence of an increased interest rate elasticity in M1 demand in the most recent years, presumably associated with the transition to the new environment prevailing from the start of Stage Three of European Monetary Union.

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The Functional Form Of The Demand For Euro Area M1

Stracca

2003

The Manchester School

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“…A similar exercise has been conducted by Dedola et al (2001) although the results are in favor of the national models. [Golinelli and Pastorelo (2002) and Clausen (1998) also reported results relative to national and area-wide levels]. Another paper concerned with the aggregation issue is that of Wesche (1997).…”

Section: Introductionmentioning

confidence: 91%

“…However it is relevant to note that there is no general consensus about the variables to be included in the previous formula. Monticelli and Strauss-Kahn (1993) and Clausen (1998), for example, consider the following restrictions for the money demand cointegrating vector:…”

Section: The Var and The Cointegrating Relationshipsmentioning

confidence: 99%