Endogeneity in European money demand

European wide monetary aggregates constructed from pre-unification data cannot be used as evidence that money demand in the euro area is stable. To overcome the Lucas critique, we apply the standard foreign exchange rate model. Since the uncoordinated country specific money supply system is abolishe...

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Bibliographic Details
Published in:European Journal of Political Economy 2000-11, Vol.16 (4), p.587-609
Main Authors: Arnold, Ivo J.M., de Vries, Casper G.
Format: Article
Language:English
Subjects:
Demand
Economic and Monetary Union
Economic Systems
Euro
Europe
European money demand
Exchange (Economics)
Fiscal Policy
Lucas critique
Monetary policy
Money
Political economy
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Summary:European wide monetary aggregates constructed from pre-unification data cannot be used as evidence that money demand in the euro area is stable. To overcome the Lucas critique, we apply the standard foreign exchange rate model. Since the uncoordinated country specific money supply system is abolished, the increased comovement between local monetary aggregates leaves little room for a free ride on the law of large numbers. Current monetary policy decisions must be based on untested relations, and given ‘the long and variable lags’, we conclude that the road towards monetary stability is a non-activist steady money supply policy.
ISSN:0176-2680
1873-5703
DOI:10.1016/S0176-2680(00)00018-5