Wealth effects on money demand in the euro area

We investigate the determinants of money demand (M3) in the euro area, considering that this variable remains an important co-determinant of monetary policy making by the European Central Bank. Regressing the real stock of M3 on real GDP, interest rates and wealth variables (real housing and stock prices) within an error-correction framework provides evidence of positive wealth effects on money demand in the long run. Correcting for this wealth effect, money demand in the euro area has grown almost exactly in line with the official reference value of 4 1/2% per annum. This article builds on research that was conducted in preparation of the annual OECD Economic Survey of the euro area and reported in Boone et al. (2004). The authors thank their colleagues in the Economics Department and the European Central Bank and two anonymous referees for their valuable comments. The authors assume full responsibility for any remaining errors and omissions. The opinions expressed in this article do not necessarily represent those of the OECD or its member countries     

The information content of money in forecasting euro area inflation

This article contributes to the debate on the role of money in monetary policy by analysing the information content of money in forecasting euro-area inflation. We compare the predictive performance within and among various classes of structural and empirical models in a consistent framework using Bayesian and other estimation techniques. We find that money contains relevant information for inflation in some model classes. Money-based New Keynesian Dynamic Stochastic General Equilibrium (DSGE) models and Vector Autoregressions (VARs) incorporating money perform better than their cashless counterparts. But there are also indications that the contribution of money has its limits. The marginal contribution of money to forecasting accuracy is often small, money adds little to dynamic factor models, and it worsens forecasting accuracy of partial equilibrium models. Finally, nonmonetary models dominate monetary models in an all-out horserace.     

A money demand system for euro area M3

In order to assess the importance of monetary and financial developments for key macroeconomic variables in the euro area a money demand system for M3 is estimated adopting a structural cointegrating VAR approach. While maintaining a good statistical representation of the data, long-run relationships are based on economic theory. By using generalized response profiles the dynamics of the money demand system is investigated without any further identifying assumptions. Error bounds of the profiles are derived using bootstrap simulations.     

Assessing monetary policy in the euro area: a factor-augmented VAR approach

In order to overcome the omitted information problem of small-scale Vector Autoregression (VAR) models, this study combines the VAR methodology with dynamic factor analysis and assesses the effects of monetary policy shocks in the euro area in the period during which there is a single monetary policy. Using the Factor-Augmented Vector Autoregressive (FAVAR) approach of Bernanke et al. (2005 Bernanke, B, Boivin, J and Eliasz, P. 2005. Measuring the effects of monetary policy: a factor-augmented vector autoregressive (FAVAR) approach. The Quarterly Journal of Economics, 120: 387–422. [Crossref], [Web of Science ®] , [Google Scholar]), we summarize the information contained in a large set of macroeconomic time series with a small number of estimated factors and use them as regressors in recursive VARs to evaluate the impact of the nonsystematic component of the European Central Bank's (ECB's) actions. Overall, our results suggest that the inclusion of factors in the VAR allows us to obtain a more coherent picture of the effects of monetary policy innovations, both by achieving responses easier to understand from the theoretical point of view and by increasing the precision of such responses. Moreover, this framework allows us to compute impulse-response functions for all the variables included in the panel, thereby providing a more complete depiction of the effects of policy disturbances. However, the extra information generated by the FAVAR also delivers some puzzling responses, in particular those relating to exchange rates.     

Using pre-EMU money market rates to assess monetary policy in the euro area

This note addresses the problems arising when using national pre-EMU interest rate data in the estimation of monetary policy reaction functions for the euro area. We provide evidence that failing to adjust for interest rate risk premia leads to an overestimation of the response of monetary policy both to inflationary pressures and to the output gap. A method for adjusting pre-EMU interest rate data for risk premia is proposed.     

On the empirical relevance of the Lucas critique: the case of euro area money demand

This paper examines the relevance of the Lucas critique for euro area money demand. Based on the money in the utility function approach, a vector error correction model is specified to investigate the relationship between money and inflation in times of policy shifts. A well defined equation for money demand is obtained. The results indicate that the evolution of M3 is still in line with money demand. In the long run, inflation is affected by asset prices and detrended output. Our results show that the Lucas critique can be refuted in case of euro area money demand for the period of quantitative easing. Thus, the estimated money demand equation provides reliable information for the conduct of future monetary policy.     

Business cycle,interest rate and money in the euro area: A common factor model

In this paper we model and analyze the contemporaneous correlation between interest rate, monetary aggregates, production and prices (of consumer goods, financial assets and real estate) of the euro area. To do this, firstly we estimate a common cyclical factor by means of an unobserved component model with the common factor located in variations in the underlying growth rates, that is, accelerations and decelerations of the variables. The variables mentioned share a significant cyclical factor being all procyclical except for narrow money. Finally we offer an explanation of this empirical finding based on the monetary policy strategy of interest rate pegging followed by the European Central Bank. In this regard, the shared cyclical information suggests (a) that inflation should be considered as a phenomenon that affects the whole economy, and therefore all prices, and (b) that monetary indicators such as monetary aggregates may contribute to the assessment of inflationary risks throughout the cycle.     

Assessing the losses in euro area potential productivity due to the financial crisis

In this article, we show that the recent financial crisis has significantly affected the potential total factor productivity (TFP) of the four largest euro area economies, as well as that of the rest of the euro area. We used a reduced-form equation of TFP, based on an approach recently developed by Cahn and Saint-Guilhem (2010). Our empirical findings show that the permanent impact on potential TFP varies across countries from –3.9 points to –1.3 points in Q2 2012. When these losses are incorporated, TFP gaps develop closely in line with capacity utilization rates (CUR). Moreover, in the case of France, including CUR in our TFP model improves the quasi-real-time reliability of TFP gap estimates.     

The (in)stability of money demand in the euro area: lessons from a cross-country analysis

The instability of standard money demand functions has undermined the role of monetary aggregates for monetary policy analysis in the euro area. This paper uses country-specific monetary aggregates to shed more light on the economics behind the instability of euro area money demand. Our results obtained from panel estimation indicate that the observed instability of standard money demand functions could be explained by omitted variables like e.g. technological progress that are important for money demand but constant across member countries.     

Assessing the predictive power of financial spreads in the euro area: does parameters instability matter?

In the empirical literature there is wide consensus that financial spreads cannot constitute a broadly based assessment on future output growth and inflation because the bivariate estimated regressions are not stable over time and lead to relatively poor out-of-sample forecasting performance (e.g. J Econ Liter 41:788–829, 2003). This conclusion arised for the USA, as well as for several European countries. In this paper we check whether the marginal predictive content of some financial spreads (the slope of the yield curve, the reverse yield gap and the credit spread) for macroeconomic forecasting in the euro area can be recovered using techniques taking into account potential parameters instability. We set up a quarterly Bayesian vector autoregression model with time-varying coefficients, comprising both target variables, as well as other monetary policy indicators, to serve as a benchmark. Then, the properties of the spreads as leading indicators are assessed by augmenting this benchmark BVAR with the spreads, one at a time. We find time variation of the coefficients to be a relevant issue in our model, especially for forecasting output growth, but financial spreads continue to have no or negligible marginal predictive content for both output growth and inflation. Overall, our results confirm that there is no ready-to-use financial spread that can replace an encompassing multivariate model for the prediction of target variables in the euro area.      

Business investment in euro area countries: the role of institutions and debt overhang

The recovery of business investment in the euro area has been sluggish, thereby hampering aggregate demand in the short term and potential growth in the long run. While we show that business investment can be associated to cost and supply of credit, cyclical demand conditions and economic uncertainty. But we also find evidence of additional factors. We suggest that there exists a link between excess leverage and weak economic institutions on the one hand and subdued investment growth on the other hand. Moreover, in euro area countries with both larger excess leverage and weaker economic institutions, the link with business investment is found to be stronger. The link between investment and weak institutions or excess leverage highlights the importance of structural reforms aimed at easing business regulations, reducing administrative burdens and increasing the efficiency of insolvency frameworks. These reforms are thus expected to reduce distortions in the allocation of resources and be supportive of a smoother deleveraging process, hence fostering business investment.     

Post-crisis business investment in the euro area and the role of monetary policy

ABSTRACT

Business investment in the euro area strongly declined during the Global Financial Crisis and the Sovereign Debt Crisis. It has not yet rebounded to its pre-crisis trend despite the very expansionary monetary policy measures of the ECB. We analyse the sluggish recovery in business investment in the euro area and the role of monetary policy in three steps. We investigate the main factors that have impeded business investment since the Global Financial Crisis. We empirically analyse how business investment has developed compared to typical patterns during other financial crises. Based on these results, we then discuss how effective monetary policy has been in stimulating business investment since the Global Financial Crisis. We conclude that business investment in the euro area has developed broadly in line with typical post-crisis patterns. Monetary policy significantly contributed to stabilize business investment at the beginning of the crises. In the aftermath of the crises, however, there seems to be little scope for monetary policy to further stimulate investment.     

The role of labor markets for euro area monetary policy

In this paper, we explore the role of labor markets for monetary policy in the euro area in a New Keynesian model in which labor markets are characterized by search and matching frictions. We first investigate to which extent a more flexible labor market would alter the business cycle behavior and the transmission of monetary policy. We find that while a lower degree of wage rigidity makes monetary policy more effective, i.e. a monetary policy shock transmits faster onto inflation, the importance of other labor market rigidities for the transmission of shocks is rather limited. Second, having estimated the model by Bayesian techniques we analyze to which extent labor market shocks, such as disturbances in the vacancy posting process, shocks to the separation rate and variations in bargaining power are important determinants of business cycle fluctuations. Our results point primarily towards disturbances in the bargaining process as a significant contributor to inflation and output fluctuations. In sum, the paper supports current central bank practice which appears to put considerable effort into monitoring euro area wage dynamics and which appears to treat some of the other labor market information as less important for monetary policy.     

Incentives to produce quality and the liquidity of money

Summary I study a version of the Williamson-Wright (1994) model that results from ruling out direct barter. Although one can no longer argue that the value of money comes exclusively from private information, one can use the simplified model to address a variety of other issues. In particular, one can characterize analytically the set of equilibria and their properties. One can also analyze the trade-off between providing liquidity to facilitate trade and providing incentives to produce high quality, and address some other issues related to policy and welfare, including the effects of inflation on the incentives to produce high quality.I am grateful to Faruk Gul, Yiting Li, Nicholas Yannelis, an anonimous referee and especially Randall Wright for their input.     

“流动性过剩”研究综述（上）——流动性过剩的内涵、衡量标准及产生机制

近些年来,“流动性过剩”已成为中国乃至全球经济和金融运行中的一个较为突出的问题,并引起了社会各界广泛的关注与讨论。本文对这些代表性的文献进行系统的梳理,为进一步的研究提供参考。     

Measures of underlying inflation in the euro area: assessment and role for informing monetary policy

The paper evaluates the 24-month-ahead inflation forecasting performance of various indicators of underlying inflation and structural models. Measures derived using the generalized dynamic factor model (GDFM) overperform other measures over the monetary policy horizon and are leading indicators of headline inflation. Trimmed means, although weaker than GDFM indicators, have good forecasting performance, while indicators by permanent exclusion underperform but provide useful information about short-term dynamics. The forecasting performance of theoretically-founded models that relate monetary aggregates, the output gap, and inflation improves with the time horizon but generally falls short of that of the GDFM. A composite measure of underlying inflation, derived by averaging the statistical indicators and the model-based estimates, improves forecast accuracy by eliminating bias and offers valuable insight about the distribution of risks.     

The money demand and the loss of interest for the euro in Romania

We generalize a money demand micro-founded model to explain Romanians’ recent loss of interest for the euro. We show that the reason behind this loss of interest is a severe decline in the relative degree of the euro liquidity against that of the Romanian leu. Our empirical findings also suggest that the two currencies are rather complements than substitutes, providing thus evidence for a reduced level of monetary integration of Romania with the Euro area. These results put into question the interest for the euro adoption in the next period.     

Growth accounting for the euro area

This article is concerned with the estimation of euro area potential output growth and its decomposition according to the sources of growth. The growth accounting exercise is based on a multivariate structural time series model which combines the decomposition of total output according to the production function approach with price and wage equations that embody Phillips-type relationships linking inflation and nominal wage dynamics to the output gap and cyclical unemployment, respectively. Assuming a Cobb?CDouglas technology with constant returns to scale, potential output results from the combination of the trend levels of total factor productivity (TFP) and factor inputs, capital and labour (hours worked), which is decomposed into labour intensity (average hours worked), the employment rate, the participation rate and population of working age. The nominal variables (prices and wages) play an essential role in defining the trend levels of the components of potential output, as the latter should pose no inflationary pressures on prices and wages. The structural model is further extended to allow for the estimation of potential output growth and the decomposition according to the sources of growth at different horizons (long run, medium run and short run); in particular, we propose and evaluate a model-based approach to the extraction of the low-pass component of potential output growth at different cut-off frequencies. The approach has two important advantages: the signal extraction filters have an automatic adaptation property at the boundaries of the sample period, so that the real-time estimates do not suffer from what is often referred to as the ??end-of-sample bias??. Secondly, it is possible to assess the uncertainty of potential output growth estimates with different degrees of smoothness.