No. 405 - Money Demand in the Euro Area: Do National Differences Matter?

This paper assesses the relevance of national information in estimating the demand for euro-area M3 from three perspectives. First, we check whether aggregating national money demands is appropriate. Second, we compare time-series and panel methods to estimate aggregate long-run coefficients. Finally, we investigate the differences among national money demands. We find that the hypothesis of perfect aggregation is not rejected. Nevertheless, some estimates of area-wide long-run parameters are sensitive to the method used to combine national information. We also find that the main difference among individual countries’ money demands is their interest elasticity, as well as the existence of country-specific structural breaks. We conclude that the area-wide equation is an appropriate analytical tool; national information may be useful to interpret “special factors” and institutional events.