Wealth and the demand for money in the European union

Abstract

Abstract. This study presents the results of an empirical analysis of the demand for money in the European Union as a whole over the period 1971±1995, with a particular focus on the impact of ®nancial wealth. The empirical evidence shows a substantial impact of wealth on the demand for M2 and M3, whereas no in¯uence of wealth on the demand for M1 is found. This ®nding may explain the remarkable increase of the broad monetary aggregates over the last decade or so. This means that taking into account the growth of wealth, the monetary expansion has been fairly modest. The evidence thus indicates that the strong increase of M2 and M3 should be attributed to portfolio investment considerations rather than to an expansionary monetary policy.

Currency Substitution and Money Demand in Euroland

“…The estimated income elasticity is 1.3 and the Wald test for a unit income elasticity gives a c 2 (1) test value of 38.1 ([(1.3 j 1.0)/0.048] 2 ), indicating rejection at the 1 percent significance level. Rejection of unit income elasticity is common to estimates (1)Y(6) and is in accordance to the previous literature on euroarea money demand [Brand and Cassola, 2004;Fase and Winder, 1998]. The semielasticity of the domestic interest rate is negative, as expected, and significant at the 1 percent level.…”

“…Recent estimates for the euro-area have considered the inflation rate (p) as an argument of the money demand function [Fase and Winder, 1998]. In light of the PBM, this parameter captures substitutability between money and real assets.…”

“…Hence, its coefficient in the money demand equation is expected to be negative. Fase and Winder [1998] and Coenen and Vega [2001] interpret instead the short-term interest rate as a proxy for the M3 own return, thus, expecting a positive coefficient. However, the evidence has not been favourable to this second approach.…”

“…Regardless the quality of the proxies used, it is remarkable that in all these studies the respective coefficient was found to be significant. It is, thus, surprising that the most recent money demand estimates for the euro-area [Brand and Cassola, 2004;Coenen and Vega, 2001;Funke, 2001;Fagan and Henry, 1999;Fase and Winder, 1998;Spencer, 1997] have been entirely devoted to the closed economy portfolio balance model.…”

Is Euro Area Money Demand (Still) Stable? Cointegrated VAR Versus Single Equation Techniques

“…In this context it is possible to use the M3 shares instead of the GDP shares of each country as weights (Bruggeman et al (2003), p. 12). Fase and Winder (1998) discuss the effects based on alternative aggregation methods. Winder (1997) and Beyer et al (2001) provide a general discussion on aggregation issues underlying the construction of historical euro area data.…”