The demand for money in the Netherlands and the other EC countries

Abstract

This paper presents an analysis of the demand for money in each of the single EC countries, using a uniform data set and a common economic framework. The analysis differs from other studies in two major respects. Firstly, a countrywise set-up is chosen instead of an analysis of EC aggregates and secondly, three monetary aggregates —M1, M2, andM3 — are analysed. This approach does justice to possible differences in money demand behaviour in the various countries and avoids the aggregation problem. The estimated money demand equations belong to the class of error-correction models and offer a tool for interpreting differences in monetary developments in the single EC countries. The estimation results show that in most member states the price elasticities are slightly below 1. Other remarkable results are that the demand for money in the southern EC countries is less sensitive to changes in the interest rates and the inflation rate than in the northern countries and that the demand for broadly defined money is more stable than the demand for narrow money. Stability also seems to depend on the size of the country. By weighting the estimates for the individual countries, elasticities of the demand for money of the EC as a whole are obtained, which have a plausible order of magnitude.