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

Abstract

We employ a recent time-varying cointegration test to revisit the usefulness of long-run money demand equations for the ECB, addressing the issue of their instability by means of 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 a precautionary motive, measured by changes in unemployment. Second, we use the model to derive relevant policy implications for the ECB, since excess liquidity looks more useful for forecasting stock market busts than future inflation. Overall, this evidence points to (i) a possible evolution of the monetary pillar in the direction of pursuing financial stability and (ii) the exclusion of a sudden liquidity-driven inflationary burst after the exit from the prolonged period of unconventional monetary measures. JEL Classification numbers: E41, E52, C32. *The views here expressed are those of the authors and do not necessary reflect those of the Banca d'Italia or the Eurosystem.1 In contrast, Ireland (2004) has challenged this view and a number of more recent studies have included money in models aimed to monetary policy analysis (Zanetti, 2012;Benati et al., 2017).

A Time-Varying Approach of the Us Welfare Cost of Inflation

“…To the best of our knowledge, this is the first paper to estimate time-varying, long-run money demand functions for the US economy, and more importantly, also the first to provide a time-varying measure of the associated welfare costs of inflation, using quarterly data on the measure of real money balances, real income, and nominal interest rate over the period of 1959:Q1 to 2010:Q4. Zuo and Park (2011) and Barigozzi and Conti (2014) provide estimates of time-varying long-run money demand functions for China and Europe, based on the single-equation Park and Hahn (1999) and Bierens and Martins (2010) approaches, respectively. Still, neither of them do (time-varying) welfare analysis.…”

“…Then, they re-examine the data sample for cointegration with breaks in the structure, finding such breaks in 1945 and 1976. Zuo and Park (2011) and Barigozzi and Conti (2014) provide estimates of TV long-run money-demand functions for China and Europe, based on the single-equation Park and Hahn (1999) and Bierens and Martins (2010) approaches, respectively. Still, neither of them do (TV) welfare analysis.…”

Monetary overhang in times of covid: evidence from the euro area

“…Early examples of this approach are Artis and Beyer (2004), Coenen and Vega (2001) and Gerlach and Svensson (2003). More recently, Barigozzi and Conti (2018), Assenmacher and Beyer (2020) and Jung and Carcel Villanova (2020) have examined the long-run time-series properties of aggregate European money demand.…”

Análisis de Estabilidad en el Modelo de Cartera de la Demanda de Dinero en la Eurozona: 1999-2023

“…El agregado M2 goza de una posición prominente en los análisis monetarios de US, siendo estos análisis mucho más escasos en la EA (Reynard, 2007). Barigozzi y Conti (2018), mediante los test de cointegración de Bierens y Martins (2010), realizan una comparación de modelos entre diferentes especificaciones y descubren que los factores principales para la dinámica del agregado monetario M3 de la EA son el spread de la relación precio/beneficio con los activos de US y los cambios en la tasa de desempleo, representativos del motivo especulación y del motivo precaución de la demanda de saldos reales, respectivamente, y estiman un nuevo VECM estable del dinero, mercado de acciones y desempleo. Respecto de las quantitative easing sostienen que constituyen un indicador adelantado de periodos de estrés financiero y tienen también un significativo, aunque débil, contenido para pronosticar la inflación.…”