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M3 money demand and excess liquidity in the euro area

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Abstract

Recent empirical studies have found evidence of unstable long run money demand functions if recent data are used. If the link between money balances and the macroeconomy is fragile, the rationale of monetary aggregates in the ECB strategy has to be doubted. In contrast we present a “stable” long run money demand relationship for M3 for the period 1983–2006. To obtain the result, the short run homogeneity restriction between money and prices is relaxed and a break in the income elasticity of money demand after 2001 is taken into account. Measures of excess liquidity do not show significant inflation pressures.

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Authors and Affiliations

  1. German Institute for Economic Research (DIW Berlin), Mohrenstr. 58, 10117, Berlin, Germany

    Christian Dreger

  2. Freie Universität Berlin, Boltzmannstr. 20, 14195, Berlin, Germany

    Jürgen Wolters

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  1. Christian Dreger
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  2. Jürgen Wolters
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Correspondence to Christian Dreger.

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Dreger, C., Wolters, J. M3 money demand and excess liquidity in the euro area. Public Choice 144, 459–472 (2010). https://doi.org/10.1007/s11127-010-9679-5

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  • DOI: https://doi.org/10.1007/s11127-010-9679-5

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