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On the sources of Euro area money demand stability: a time-varying cointegration analysis

Barigozzi, Matteo and Conti, Antonio M. (2010) On the sources of Euro area money demand stability: a time-varying cointegration analysis. ECARES working paper, 2010‐022. Université Libre de Bruxelles, Brussels, Belgium.

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Abstract

We adopt a time-varying cointegration test to discriminate among different empirical studies claiming to find a stable Euro Area money demand equation. A time-invariant relation explaining real balances is rejected by data, even when accounting for housing, financial and labour markets. Conversely, an international portfolio allocation approach provides stabilization. In particular, international financial markets, rather than monetary policy, are the key determinant of the observed diverging path of money growth. In terms of policy, we provide empirical support for a New Two Pillars Strategy aimed to achieve financial stability through money and credit and price stability through interest rates.

Item Type: Monograph (Working Paper)
Official URL: http://www.ecares.org
Additional Information: © 2010 Université Libre de Bruxelles
Library of Congress subject classification: H Social Sciences > HA Statistics
H Social Sciences > HB Economic Theory
Journal of Economic Literature Classification System: C - Mathematical and Quantitative Methods > C3 - Econometric Methods: Multiple; Simultaneous Equation Models; Multiple Variables; Endogenous Regressors > C32 - Time-Series Models
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E41 - Demand for Money
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy
Sets: Departments > Statistics
Collections > Economists Online
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 2010‐022
Date Deposited: 07 Jan 2011 09:52
URL: http://eprints.lse.ac.uk/31196/

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