Monetary analysis of Euro-area data

8.3.1 Money demand in the Euro area 1980—97

In this section, we establish that money demand in the Euro area can be mod­elled with a simple equilibrium correction model. We base the empirical results on the work by Coenen and Vega (2001) who estimate the aggregate demand for broad money in the Euro area. In Table 8.1 we report a model which is a close approximation to their preferred specification for the quarterly growth

Table 8.1

Подпись: Д(т — p)t Подпись: —0.74 (0.067) image127 Подпись: 1

Empirical model for Д(ш — p)t in the Euro area based on
Coenen and Vega (2001)

Дpant + Дpant і

— 0.36ДИЬ-_1 — 0.53 —-— t-1 — 0.01dum86t

(0.08) (0.050) 2 (0.002)

— 0.14[(m — p) — 1.140y + 1.462Дpan + 0.820(RL — RS)]t-2 (0.012)

Подпись: а0.23%

Подпись: Diagnostic tests

FAr(5, 55) =0.97[0.44]

Farch (4, 52) = 0.29[0.89]

X2cnmality(2) = 0.82[0.66]

Fhetx2 (12, 47) = 0.65[0.79] FHETxiXj(24, 35) = 0.59[0.91] Freset(1, 59) = 0.16[0.69]

Note: The sample is 1980(4)-1997(2), quarterly data.

rate in aggregated real broad (M3) money holdings, Д(т — p)t, over the ori­ginal sample period 1980(4)-1997(2). We condition on the estimated long-run real money demand relationship (8.7) in Coenen and Vega (2001):

(m — p)t = 1.14yt — 1.462Дpan — 0.820(RL — RS)t, (8.7)

where (m — p)t denotes (log of) real M3 money holdings, yt is (log of) real GDP, RSt is the short interest rate, RLt is the long interest rate, and Дpant denotes the annualised quarterly change in the GDP deflator.2

The money demand relationship for the Euro area appears to be fairly well specified with stable parameters as indicated by the plot of recursive residuals and Chow tests in Figure 8.1. The question is: can this model be turned into a model of inflation by inversion?

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