Money Demand in Europe

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The EURO has now been in place for more than two years, but only the future will tell if the ECB policy proves successful in the long-term. Whether the monetary authorities have sufficient information, and more important, the right information to manage the EURO currency, has been an open question and will remain so for some time to come. This book discusses the economic principals underlying the demand for money as a potentially useful relationship for policy makers, and the possibilities to recover its properties by means of multivariate time series analysis. It applies the outcome of these considerations to the whole EURO area as well as to France. While for the aggregate, a money demand function can be specified and be shown to have good forecasting properties, this fails in the French case. This book puts forth economic arguments that attempt to explain this. At various steps of the analysis, special attention is given to breaks in time series data. The presentation carefully outlines all means that have been used to cope with shifts in coefficients of the cointegration relations. A separate chapter is dedicated to testing for unit roots in time series with level shifts. This includes detection of break points, provision of test statistics, graphical evaluation of the empirical models and illustration of the procedure with a large set of international macroeconomic data.