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A Monthly Monetary Model with Banking Intermediation for the Euro Area

79 Pages Posted: 26 Jan 2004  

Annick Bruggeman

National Bank of Belgium

Marie Donnay

European Commission (DG Ecfin)

Date Written: September 2003


This monthly monetary model for the euro area is gradually constructed from its two constituting components: a money demand and a loan demand model which both include the relation between the respective retail bank rates and the short-term market interest rate. Eventually, the encompassing monetary model allows for interactions between money and loans induced by the intermediation role of the banking sector.

Estimating the encompassing model over the period January 1981 - September 2001 results in a money demand equation which corroborates the existing evidence. To stabilise the loan demand equation, however, an extra variable capturing the mergers and acquisitions wave of 1999-2000 is needed. Furthermore, the model rejects the frequently used assumption of complete separability in the pricing of loans and deposits and provides some evidence for the existence of a bank lending channel. Finally, the estimation of the Structural-VECM highlights very rich dynamics in the system.

Keywords: Cointegration, Structural VECM, Money demand, Loan demand, Banking intermediation

JEL Classification: C32, E41, E43, E50, G21

Suggested Citation

Bruggeman, Annick and Donnay, Marie, A Monthly Monetary Model with Banking Intermediation for the Euro Area (September 2003). ECB Working Paper No. 264. Available at SSRN:

Annick Bruggeman (Contact Author)

National Bank of Belgium ( email )

Brussels, B-1000

Marie Donnay

European Commission (DG Ecfin) ( email )

BU-1 05/190
Brussels, Bruxelles B-1049

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