Euro Area Money Demand: Measuring the Opportunity Costs Appropriately

By Joaquim Vieira Ferreira Levy, Alessandro Calza, Dieter Gerdesmeier

November 1, 2001

Preview Citation

Format: Chicago

Joaquim Vieira Ferreira Levy, Alessandro Calza, and Dieter Gerdesmeier. Euro Area Money Demand: Measuring the Opportunity Costs Appropriately, (USA: International Monetary Fund, 2001) accessed September 20, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The existence of a well-specified and stable relationship between money and prices has long been perceived as a prerequisite for the use of monetary aggregates in the conduct of monetary policy. This paper contributes to the ongoing discussion about the stability of euro area money demand by constructing an own rate of return on euro area M3 and by analyzing its implications in a standard money demand system. Over the sample period, one cointegrating vector relating real M3, real GDP and the spread between the short-term interest rate and the own rate of M3 can be identified and interpreted as a long-run euro area money demand equation. A dynamic money demand system is subsequently estimated. Standard diagnostics stability tests and out-of-sample forecasts confirm the good statistical performance of the model.

Subject: Demand for money, Financial services, Long term interest rates, Market interest rates, Money, Short term interest rates, Yield curve

Keywords: Cointegration, Demand for money, Demand model, Europe, European Monetary Union, GDP deflator, Interest rate, Interest-rate bearing, Long- term interest rate, Long term interest rates, M3, Market interest rates, Money demand, Money demand function, Money demand system, Opportunity cost, Opportunity costs of money, Own rate of money, Short term interest rates, WP, Yield curve

Publication Details

Pages:

38
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2001/179
Stock No:

WPIEA1792001
ISBN:

9781451859034
ISSN:

1018-5941

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