Euro Area Money Demand : Measuring the Opportunity Costs Appropriately

Author/Editor:

Joaquim Vieira Ferreira Levy ; Alessandro Calza ; Dieter Gerdesmeier

Publication Date:

November 1, 2001

Electronic Access:

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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.

Series:

Working Paper No. 01/179

Subject:

English

Publication Date:

November 1, 2001

ISBN/ISSN:

9781451859034/1018-5941

Stock No:

WPIEA1792001

Format:

Paper

Pages:

38

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