Euro Area Money Demand Stability

Abstract

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">The European Central Bank (ECB) has price level stability as its primary target<span style="color: blue;">,</span> and operates via an interest<span style="color: blue;">-</span>rate measure to achieve its target over the short term. The ECB also explicitly incorporates a quantity measure, M3, into their monetary framework to help assess the medium to longer term risks to price level stability. Use of M3 by the ECB implies a stable relationship between money and prices. We analyzed the behavior of monetary aggregates<span style="color: blue;">,</span> and concluded that the ECB’s use of M3 may have some merit over the medium to longer-term as an indicator of price pressure from a quantity theory of money perspective. But there appears to be a question as to stability of money demand since it is not clear if there is a constant interest<span style="color: blue;">-</span>rate elasticity. <span style="mso-spacerun: yes;"> </span>So<span style="color: blue;">,</span> in practice<span style="color: blue;">,</span> it remains unclear if the ECB gives much credence to any of the monetary aggregates. In particular, this applies to M3 since the ECB cannot directly control that measure. </span></span></p>