Modeling the Demand for M3 in the Euro Area

25 Pages Posted: 12 Jul 2000

See all articles by Roberto Golinelli

Roberto Golinelli

University of Bologna - Department of Economics

Sergio Pastorello

University of Bologna - Department of Economics

Date Written: undated


Money is one of the main elements ("pillars") on which the policy strategy of the European Central Bank is based, and such a role requires that money has a stable relationship with the Euro area price level. Typically, the stability of this relation is tested in the context of the so called 'money demand equation'. Since the beginning of the 90s, many studies have suggested that the demand for Euro area broad money is stable over the long run because the estimation of an area-wide demand for money function provides an appropriate solution to a number of potential causes of misspecification of the single-country relations (such as spillover effects and currency substitution), and enjoys the positive consequences of a statistical averaging effect. On the other side, it must be stressed that previous benefits can be achieved at the risk of introducing parameter heterogeneity into the area-wide relationship. In order to shed some light on the issue, the present study is first devoted to an analysis of the main econometric features of the money M3 demand at Euro area and single country levels, then it compares the two sets of results in a common framework that, differently from all previous studies, explicitly takes account of the potential nonstationarity of the variables of interest in both estimation and testing phases. The comparison shows that the area-wide money demand is more smooth and less subject to shocks than the single-country ones. Finally, a number of poolability tests run over subgroups highlight that low precision associated with the estimates of the parameters of the national models makes it impossible to exclude that their long run specifications do in fact coincide.

JEL Classification: E41, C22

Suggested Citation

Golinelli, Roberto and Pastorello, Sergio, Modeling the Demand for M3 in the Euro Area (undated). Available at SSRN: or

Roberto Golinelli (Contact Author)

University of Bologna - Department of Economics ( email )

Strada Maggiore 45
Bologna, 40125
+39 051 209 2638 (Phone)
+39 051 209 2664 (Fax)

Sergio Pastorello

University of Bologna - Department of Economics ( email )

Via Saragozza, 8
Bologna, 40125
+39 051 2098144 (Phone)
+39 051 2098040 (Fax)

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