Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/89287
Authors: 
Barigozzi, Matteo
Conti, Antonio
Year of Publication: 
2013
Series/Report no.: 
LEM Working Paper Series 2013/11
Abstract: 
We revisit the usefulness of long-run money demand equations for the European Central Bank. We first conduct a model evaluation exercise by means of a recent time-varying cointegration test. A stable relation for euro area M3 is not rejected by data only when accounting for both a speculative motive, represented by international financial markets, and a precautionary motive, proxied by changes in the unemployment rate. Second, relying on this finding, we propose and estimate a novel time-invariant specification for money demand which allows us (i ) to build a leading indicator of stock market busts and (ii ) to describe the anomalous behavior of M3 in the last decade. Excess liquidity matters for both financial and price stability.
Subjects: 
money demand
time-varying cointegration
price-earnings ratios
unemployment rate
monetary policy
JEL: 
E41
E52
C32
Document Type: 
Working Paper

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