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Keywords

money demand; cointegrated VARs; households

Abstract

In this paper we analyse household holdings of the broad monetary aggregate M3 in the euro area from 1991 until 2009. Households are the largest money-holding sector in the euro area. We develop four models, two in nominal, two in real terms, with satisfactory economic and statistical properties. The main determinants are a transactions variable, wealth considerations, opportunity costs and uncertainty. In particular housing wealth is found to play an important role. The models are robust to different estimation strategies, samples considered and a multitude of misspecification tests. According to our analysis, it is quite apparent that in equilibrium, households jointly determine consumption and broad money holdings which are both influenced by wealth as well as interest rates. The importance of household money holdings for consumption expenditures may cast doubt on a purely passive role for money.

Acknowledgments

We would like to thank two anonymous referees for their helpful comments. We are also 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, as well as Gianni Amisano, Thomas Westermann and participants at the ECB expert meeting on money demand on a previous version of the paper and the ROME network are gratefully acknowledged. The views presented herein are those of the authors and do not necessarily reflect the position of the European Central Bank or the Eurosystem.

First Page

83

Last Page

115

Page Count

33

Received Date

21 May 2014

Revised Date

28 July 2014

Accept Date

27 October 2014

Online Available Date

19 November 2014

DOI

10.7172/2353-6845.jbfe.2014.2.4

JEL Code

E41; C32; D12

Publisher

University of Warsaw

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