Euro Area Money Demand Measuring the Opportunity Costs Appropriately

38 Pages Posted: 3 Feb 2006

See all articles by Alessandro Calza

Alessandro Calza

European Central Bank (ECB)

Dieter Gerdesmeier

European Central Bank (ECB)

Joaquim Levy

Ministry of Finance, Brazil (on leave)

Date Written: November 2001

Abstract

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.

Keywords: European Monetary Union money demand own rate of money M3 cointegration

JEL Classification: C22 C32 E41

Suggested Citation

Calza, Alessandro and Gerdesmeier, Dieter and Levy, Joaquim, Euro Area Money Demand Measuring the Opportunity Costs Appropriately (November 2001). IMF Working Paper, Vol. , pp. 1-38, 2001. Available at SSRN: https://ssrn.com/abstract=880246

Alessandro Calza (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
0049 69 13440 (Phone)
0044 69 1344 6000 (Fax)

Dieter Gerdesmeier

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Joaquim Levy

Ministry of Finance, Brazil (on leave) ( email )

Rio de Janeiro
Brazil

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