On the Stability of Euro Area Money Demand and its Implications for Monetary Policy

40 Pages Posted: 4 May 2010 Last revised: 27 Nov 2017

See all articles by Matteo Barigozzi

Matteo Barigozzi

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES); London School of Economics and Political Science; University of Bologna

Antonio Maria Conti

Banca d'Italia

Date Written: October 20, 2017

Abstract

We employ a recent time-varying cointegration test to revisit the usefulness of long-run money demand equations for the ECB, addressing the issue of their instability by means of a model evaluation exercise. Building on the results, we make a twofold contribution. First, we propose a novel stable money demand equation relying on two crucial factors: a speculative motive, represented by domestic and foreign price-earnings ratios, and a precautionary motive, measured by changes in unemployment. Second, we use the model to derive relevant policy implications for the ECB, since excess liquidity looks more useful for forecasting stock market busts than future inflation. Overall, this evidence points to (i) a possible evolution of the monetary pillar in the direction of pursuing financial stability and (ii) the exclusion of a sudden liquidity–driven inflationary burst after the exit from the prolonged period of unconventional monetary measures.

Keywords: money demand , time-varying cointegration, price-earnings ratios, unemployment rate, monetary policy

JEL Classification: E41, E52, C32

Suggested Citation

Barigozzi, Matteo and Barigozzi, Matteo and Barigozzi, Matteo and Conti, Antonio Maria, On the Stability of Euro Area Money Demand and its Implications for Monetary Policy (October 20, 2017). Available at SSRN: https://ssrn.com/abstract=1599669 or http://dx.doi.org/10.2139/ssrn.1599669

Matteo Barigozzi

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES) ( email )

Ave. Franklin D Roosevelt, 50 - C.P. 114
Brussels, B-1050
Belgium

HOME PAGE: http://www.barigozzi.eu/research.html

London School of Economics and Political Science ( email )

Houghton Street
London, England WC2A 2AE
United Kingdom

University of Bologna ( email )

Piazza Scaravilli 2
Bologna, 40100
Italy

Antonio Maria Conti (Contact Author)

Banca d'Italia ( email )

Via Nazionale 91
Roma, 00161
Italy

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