Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/264723 
Year of Publication: 
2006
Series/Report no.: 
Working Paper No. 131
Publisher: 
Oesterreichische Nationalbank (OeNB), Vienna
Abstract: 
This paper analyzes the recently documented instability of money demand in the euro area in the framework of a Markov switching trend model. First, we consider a standard flexible price model with stable money demand, rational expectations, and an exogenous income-money ratio which follows a Markov trend. This framework, which implies an influence of expected future money on prices, leads to a cointegrating relationship between (log) prices and the (log of the) money-income ratio with a switching intercept term. Of course, this likely leads to a rejection of cointegration by standard tests and to the erroneous conclusion of an unstable money demand. Second, a more general model allowing for endogeneity and more general dynamics is estimated with Bayesian methods for euro area data from 1975-2003. This exercise provides support for our model and a stable demand for M3 in the euro area.
Subjects: 
Bayesian cointegration analysis
Markov trend
Markov chain Monte Carlo
money demand
JEL: 
C11
C32
E41
Document Type: 
Working Paper

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