Abstract
We create a euro-area Divisia-money dataset and estimate theoretically correct responses to money, user cost and interest rate shocks using structural vector-autoregressions. Our findings suggest that money matters for output, prices and interest rates, while the European Central Bank can influence monetary developments.
Highlights
Money has a minor role in monetary policy and macroeconomic modelling
To the extent that the long-term interest rate reflects European Central Bank (ECB) monetary actions, this finding suggests that the ECB reacted to monetary developments, e.g. by cutting its policy rate or by adopting unconventional monetary measures following a negative money shock
In the Divisia-model an interest rate shock increases the user cost, which may explain why the reaction of money is negative to an interest rate shock
Summary
Money has a minor role in monetary policy and macroeconomic modelling. One important cause for this disregard is empirical: estimated money demand functions have been found to be unstable and money has proved to be less effective in predicting economic outcomes. Our article creates a new euro-area Divisia-money dataset and examines the impacts of shocks to money, user cost and interest rate on output, prices and monetary variables in the euro area, using SVAR models. The ECB indicators of euro-area outstanding money stocks are subject to two major shortcomings They relate to the changing country-composition euro-area and there was a level shift in these indicators whenever a new member joined the euro area. They are subject to reclassification changes, such as halving the outstanding stock of the measure of repurchase agreements in June 2010.
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