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Expected Money Growth, Markov Trends and the Instability of Money Demand in the Euro Area

Kaufmann, Sylvia and Kugler, Peter. (2005) Expected Money Growth, Markov Trends and the Instability of Money Demand in the Euro Area. WWZ Discussion Papers, 2005 (07).

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Abstract

This paper analyzes the recently documented instability of money demand in the euro area in the framework of a Markov switching trend model. First, we consider a standard °exible price model with stable money demand, rational expectations, and an exogenous income-money ratio which follows a Markov trend. This framework, which implies an in°uence of expected future money on prices, leads to a cointe- grating relationship between (log) prices and the (log of the) money-income ratio with a switching intercept term. Of course, this likely leads to a rejection of coin- tegration by standard tests and to the erroneous conclusion of an unstable money demand. Second, a more general model allowing for endogeneity and more general dynamics is estimated with Bayesian methods for euro area data from 1975-2003. This exercise provides support for our model and a stable demand for M3 in the euro area.
Faculties and Departments:06 Faculty of Business and Economics
06 Faculty of Business and Economics > Departement Wirtschaftswissenschaften
06 Faculty of Business and Economics > Departement Wirtschaftswissenschaften > Professuren Wirtschaftswissenschaften > Geld- und Währungsgeschichte (Kugler)
12 Special Collections > WWZ Publications > WWZ Discussion Papers and Working Papers
UniBasel Contributors:Kugler, Peter and Kaufmann, Sylvia
Item Type:Working Paper
Publisher:WWZ, University of Basel
Number of Pages:15
Note:Publication type according to Uni Basel Research Database: Discussion paper / Internet publication
Language:English
Identification Number:
  • handle: RePEc:bsl:wpaper:2005/07
Last Modified:09 Mar 2018 10:53
Deposited On:08 Mar 2018 09:06

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