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The money demand function for the Euro area: one step beyond

Author

Listed:
  • Sanvi Avouyi-Dovi

    (Banque de France)

  • Françoise Drumetz

    (Banque de France)

  • Jean-Guillaume Sahuc

    (Banque de France)

Abstract
This article sets out to re-examine the money demand function for the euro area. Traditional specifications often yield unsatisfactory results: instability of short and long-term coefficients; relatively large differences between estimated and actual value of variables; and significant changes in the number of long-term relationships, etc. Using a standard Vector Error Correction Model, we find that the usual specification is indeed unstable. However, introducing an European equity price gives rise to a more stable system. Furthermore, recursive estimates confirm the relative stability of long-term coefficients. Estimates of the real money gap, based on the money demand equation including equity prices, point to moderate, albeit persistent, excess liquidity in the euro area in the recent years. The real money gap contains information about future inflation but this content may have diminished since 2001.

Suggested Citation

  • Sanvi Avouyi-Dovi & Françoise Drumetz & Jean-Guillaume Sahuc, 2007. "The money demand function for the Euro area: one step beyond," Documents de recherche 07-08, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
    • Handle: RePEc:eve:wpaper:07-08
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Demand for money; stability; financial assets; substitution effect;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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