| Open | Published:
Household money demand: The euro area case
Swiss Journal of Economics and Statisticsvolume 148, pages409–438 (2012)
In this paper we analyse household holdings of the broad monetary aggregate M3 in the euro area from 1991 until 2010. We develop a nominal model with satisfactory economic and statistical properties. The main determinants are a transactions variable, wealth considerations, opportunity costs and uncertainty. The model is robust to different samples considered and a multitude of mis-specification tests. The exercise also provides insights that go beyond the portfolio allocation decision of households. According to our analysis, it is quite apparent that in equilibrium, households jointly determine consumption and broad money holdings both influenced by wealth as well as interest rates.
Adalid, Ramón, and Carsten Detken (2007), “Liquidity Shocks and Asset Price Boom/Bust Cycles”, ECB Working Paper No. 732.
Anderson, Richard, and Sean Collins (1997), “Modelling US Households’ Demand for Liquid Wealth in an Era of Financial Change”, Journal of Money, Credit and Banking 30(1), pp. 82–101.
Atta-Mensah, Joseph (2004), “Money Demand and Economic Uncertainty”, Bank of Canada Working Paper 2004-25.
Attanasio, Orazio, Guiso, Luigi, and Tullio Jappelli (1998), “The Demand for Money, Financial Innovation, and the Welfare cost of Inflation: An Analysis with Household Data”, National Bureau of Economic Research Working Paper 6593.
Beyer, Andreas (2009), “A Stable Model for Euro Area Money Demand: Revisiting the Role of Wealth”, ECB Working Paper No. 1111.
Boone, Laurence, and Paul van den Noord (2008), “Wealth Effects on Money Demand in the Euro Area”, Empirical Economics 34(2), pp. 525–536.
Butkiewicz, James J. and Margaret M. McConnell (1995), “The Stability of the Demand for Money and M1 Velocity: Evidence from the Sectoral Data”, Quarterly Review of Economics and Finance 35(3), pp. 233–243.
Calza, Alessandro, Dieter Gerdesmeier, and Joaquim Levy (2001), “Euro Area Money Demand: Measuring the Opportunity Costs Appropriately”, IMF Working Paper 01/179.
Chadha, Jagijt, Haldane, Andrew and Norbert Janssen (1998), “Shoe Leather Costs Reconsidered”, Economic Journal 108(447), pp. 363–382.
Chang, Yoosoon, Joon Y. Park, and Kevin Song (2002), “Bootstrapping Cointegrating Regressions”, Department of Economics Working Paper 2002–04, Rice University.
Cheung, Yin-Wong, and Kon S. Lai (1993), “Finite-Sample Sizes of Johansen’s Likelihood Ratio Tests for Cointegration”, Oxford Bulletin of Economics and Statistics 55(3), pp. 313–328.
Chrystal, Alec, and Paul Mizen (2001), “Consumption, Money and Lending: A Joint Model for the UK Household Sector”, Bank of England Working Paper 134.
Davidson, Russell, and James G. MacKinnon (1993), Estimation and Inference in Econometrics, New York, Oxford: Oxford University Press.
de Bondt, Gabe (2009), “Euro Area Money Demand: Empirical Evidence on the Role of Equity and Labour Markets”, ECB Working Paper No. 1068.
Detken, Carsten, and Frank Smets (2004), “Asset Price Booms and Monetary Policy”, ECB Working Paper 364, May.
Doornik, Jurgen A., and Henrik Hansen (2008), “An Omnibus Test for Univariate and Multivariate Normality”, Oxford Bulletin of Economics and Statistics, 70, pp. 927–939.
Ericsson, Neil R. (1998), “Empirical Modelling of Money Demand”, Empirical Economics 23(3), pp. 295–315.
Ericsson, Neil R., David F. Hendry and Hong-Anh Tran (1994), “Cointegration, Seasonality, Encompassing, and the Demand for Money in the United Kingdom”, in: C. Hargreaves (ed.), Non-stationary Time-series Analysis and Cointegration, pp. 179–224, Oxford: Oxford University Press.
European Central Bank (2006), “Sectoral Money Holdings and the Information Content of Money with Respect to Inflation”, Box 1, Monthly Bulletin, September, pp. 18–20.
Feiss, Norbert, and Ronald MacDonald (2001), “The Instability of the Money Demand Function, an I(2) Interpretation”, Oxford Bulletin of Economics and Statistics 63(4), pp. 475–495.
Friedman, Milton (1956), Studies in the Quantity Theory of Money, Chicago: University of Chicago Press.
Fujiki, Hiroshi, and Cheng Hsiao (2008), “Aggregate and Household Demand for Money, Evidence from Public Opinion Survey on Household Financial Assets and Liabilities”, Bank of Japan Institute of Monetary and Economic Studies Discussion Working Paper No. 2008-E-17.
Garver, Cecily, and Laurence Radecki (1987), “The Household Demand for Money, Estimates from Cross-Sectional Data”, Federal Reserve Bank of New York Quarterly Review, Spring, pp. 29–34.
Gerdesmeier, Dieter (1996), „Die Rolle des Vermögens in der Geldnachfrage“, Discussion paper 96/5, Volkswirtschaftliche Forschungsgruppe der Deutschen Bundesbank.
Goldfeld, Stephan (1973), “The Demand for Money Revisited”, Brookings Papers on Economic Activity 1973(3), pp. 577–646.
Greiber, Claus, and Wolfgang Lemke (2005), “Money Demand and Macroeconomic Uncertainty”, Deutsche Bundesbank Discussion Paper 26-2005.
Greiber, Claus, and Ralph Setzer (2007), “Money and Housing, Evidence for the Euro Area and the US”, Deutsche Bundesbank Discussion Paper 12-2007.
Hansen, Henrik, and Søren Johansen (1999), “Some Tests for Parameter Constancy in Cointegrated VAR-Models”, Econometrics Journal 2(2), pp. 306–333.
Jain, Parul, and Choon-Geol Moon (1994), “Sectoral Money Demand, a Cointegration Approach”, Review of Economics and Statistics 76(1), pp. 196–202.
Johansen, Søren (1996), Likelihood-Based Inference in Cointegrated Vector Autoregressive Models, 2nd ed., Oxford: Oxford University Press.
Juselius, Katerina (2006), The Cointegrated VAR Model, Methodology and Applications, Oxford: Oxford University Press.
Kilian, Lutz (2001), “Impulse Response Analysis in Vector Autoregressions with Unknown Lag Order”, Journal of Forecasting 20(3), pp. 161–179.
Kwiatkowski, Denis, Peter C. B. Phillips, Peter Schmidt, and Yongcheol Shin (1992), “Testing the Null Hypothesis of Stationarity against the Alternative of a Unit Root”, Journal of Econometrics 54(1–3), pp. 159–178.
Laumas, Gurcharan S. (1979), “The Stability of the Demand for Money by the Household Sector, A Note”, Southern Economic Journal 46(2), pp. 603–608.
Lucas, Robert (2000), “Inflation and Welfare”, Econometrica 68(2), pp. 247–274.
Lutkepohl, Helmut, and Pentti Saikkonen (1997), “Order Selection in Testing for the Cointegrating Rank of a VAR Process”, Sonderforschungsbereich 373, Quantification and Simulation of Economic Processes 93 (SFB 373 Papers).
MacKinnon, James G. (1996), “Numerical Distribution Functions for Unit Root and Cointegration Tests”, Journal of Applied Econometrics 11(6), pp. 601–618.
Martinez-Carrascal, Carmen, and Julian von Landesberger (2010), “Explaining the Money Demand of non-Financial Corporations in the Euro Area, A Macro and a Micro View”, ECB Working Paper No. 1257.
Park, Joon Y. (2003), “Bootstrap Unit Root Tests”, Econometrica 71(6), pp. 1845–1895.
Petursson, Thorarinn (2000), “The Representative Household’s Demand for Money in a Cointegrated VAR Model”, Econometrics Journal 3(2), pp. 162–176.
Read, Vicky (1996), “Sectoral Disaggregation of German M3”, Deutsche Bundesbank Discussion Paper 1–1996.
Reimers, Hans-Eggert (1991), “Comparisons of Tests for Multivariate Cointegration”, Statistical Papers 33, pp. 335–359.
Seitz, Franz, and Julian von Landesberger (2010), “Household Money Holdings in the Euro Area, an Explorative Investigation”, ECB Working Paper No. 1238.
Stracca, Livio (2001), “The Functional Form of the Demand for Euro Area M1”, The Manchester School 71(2), pp. 172–204.
Swensen, Anders R. (2006), “Bootstrap Algorithms for Testing and Determining the Cointegration Rank in VAR Models”, Econometrica 74(6), pp. 1699–1714.
Teräsvirta, Timo (1998), “Modelling Economic Relationships with Smooth Transition Regressions”, in Handbook of Applied Economic Statistics, Aman Ullah and David E.A. Giles (eds), pp. 507–552, New York et al.: Dekker.
Teräsvirta, Timo, and Ann Charlotte Eliasson (2001), “Non-Linear Error Correction and the UK Demand for Broad Money”, 1878–1993, Journal of Applied Econometrics 16(3), pp. 277–288.
Thomas, Ryland (1997), “The Demand for M4, A Sectoral Analysis Part 1 — The Personal Sector”, Bank of England Working Paper 61.
Tobin, James (1969), “A General Equilibrium Approach to Monetary Theory”, Journal of Money, Credit and Banking, 1(1), pp. 15–29.
von Landesberger, Julian (2007), “Sectoral Money Demand Models for the Euro Area Based on a Common Set of Determinants”, ECB Working Paper No. 741.
Warne, Anders (2008), Structural VAR, version 0.50, release 1.
We are grateful to Mika Tujula for providing euro area household wealth data, to Gabe de Bondt for sharing his equity market related measures and to Wolfgang Lemke for providing his uncertainty measures. Comments and suggestions by Huw Pill, Gianni Amisano, Thomas Westermann, participants at the ECB expert meeting on money demand and the ROME network as well as two anonymous referees are gratefully acknowledged.