The Long-Run Stability of European Money Demand

The Long-Run Stability of European Money Demand

The European Central Bank uses a monetary strategy which represents a combination of monetary targeting and direct inflation targeting. In this context, the stability of the long-run European money demand function is widely seen as a precondition for a strategy of monetary targeting. This paper investigates the aggregate demand for money in Europe including those countries representing the initial group in the European Monetary Union. First, we identify stable (in the sense of cointegrated) European money demand functions for M1 as well as for M3. Second, we investigate parameter constancy over time and do not find suggestive evidence of structural instability. Overall, the results provide empirical support for the European Central Bank to target a European monetary aggregate.