The Sectoral Distribution of Money Supply in the Euro Area

44 Pages Posted: 25 May 2007

Date Written: April 2007

Abstract

The strong and prolonged deviation of money growth from its reference value since 2001 has caused concern among policy-makers about the upside risks to price stability from monetary developments. In this paper we provide evidence that these risks might be smaller than previously assumed. We provide a sectoral breakdown of money holdings and show that current excess liquidity conditions are in some measure related to the acceleration of non-bank financial intermediaries' money demand, as well as to the accumulation of marketable instruments. Such increases are likely to be related more to portfolio choices than to transaction motives. We also find evidence from balance sheet data on investment funds that points to a general increase of this sector in the economy, rather than to a higher degree of liquidity of their asset positions. This is likely to imply that recent dynamics reflect, to a large extent, a permanent change in the financial structure of the economy. Finally, our sectoral analysis suggests that the threat to price stability did not appear before the end of 2005, which is also when the ECB started to raise the official interest rates.

Keywords: money holding sector, excess liquidity, money supply

JEL Classification: E41, E51

Suggested Citation

Ferrero, Giuseppe and Nobili, Andrea and Passiglia, Patrizia, The Sectoral Distribution of Money Supply in the Euro Area (April 2007). Bank of Italy Temi di Discussione (Working Paper) No. 627, Available at SSRN: https://ssrn.com/abstract=988321 or http://dx.doi.org/10.2139/ssrn.988321

Giuseppe Ferrero

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Andrea Nobili (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Patrizia Passiglia

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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