The (in)stability of money demand in the euro area: lessons from a cross-country analysis

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThe instability of standard money demand functions has undermined the role of monetary aggregates for monetary policy analysis in the euro area. This paper uses country-specic monetary aggregates to shed more light on the economics behind the instability of euro area money demand. Our results obtained from panel estimation indicate that the observed instability of standard money demand functions could be explained by omitted variables like e.g. technological progress that are important for money demand but constant across member countries. JEL classication: E41, E51, E52Keywords: Money demand, cross-country analysis, panel error correction model, euro area * We thank Jörg Breitung and Christian Oermanns for helpful comments and suggestions.

Long-Run Money Demand in OECD Countries – Cross-Member Cointegration

“…The estimated income elasticities vary between 0.18 (Garcia-Hiernaux and Cerno, 2006) and 2.66 , but are usually slightly greater than one. The estimated interest rate (semi-) elasticities are in the range of -0.71 (Nautz and Rondorf, 2010) and 0.008 (Arnold and Roelands, 2010), where the latter value should be treated as an exception with a sign contrary to theory. For the exchange rate there exists no clear sign which can be imposed from theory.…”

“…Setzer and Greiber (2007) (2010)) 1 , but panel data studies usually do not. The studies by Arnold and Roelands (2010) and Nautz and Rondorf (2010)) are the only exceptions. Arnold and Roelands (2010) found a positive impact of house prices on money demand for the whole panel of ten euro area countries, but no significant impact of stock prices.…”

“…Furthermore, this paper contributes in applying an error-correction specification using panel data to determine long-run as well as short-run coefficients of the money demand of OECD countries. Panel data studies usually estimate only the long-run relation ignoring the short-run dynamics except the studies by Valadkhani (2008) and Nautz and Rondorf (2010). The remainder of this paper is organised as follows.…”

The stability of money demand in the long-run: Italy 1861–2011

“…A common practice in the literature on money demand is to augment the basic equation in order to look for more stable relations, as instability can be due to relevant omitted variables (see, for instance, Nautz and Rondorf 2011;Foresti and Napolitano 2013). Therefore, we augment our baseline money demand (2) and re- Tables 7 and 8 show values of D-W statistic closer to two, indicating no autocorrelation.…”

The Stability of Long-Run Money Demand in Western Balkan Countries: An Empirical Panel Investigation

“…Namely, most studies focus on individual country cases, and to the author's knowledge there are none for this region. Moreover, the existing panel studies (Kumar 2010;Nautz and Rondorf 2011) usually consider only several variables (e.g. income, prices and a measure of the opportunity costs) in the money demand equation.…”