Endogeneity in European money demand
European wide monetary aggregates constructed from pre-unification data cannot be used as evidence that money demand in the euro area is stable. To overcome the Lucas critique, we apply the standard foreign exchange rate model. Since the uncoordinated country specific money supply system is abolished, the increased comovement between local monetary aggregates leaves little room for a free ride on the law of large numbers. Current monetary policy decisions must be based on untested relations, and given ‘the long and variable lags’, we conclude that the road towards monetary stability is a non-activist steady money supply policy.
|Keywords||European money demand, Lucas critique|
|Persistent URL||dx.doi.org/10.1016/S0176-2680(00)00018-5, hdl.handle.net/1765/12395|
Arnold, I.J.M., & de Vries, C.G.. (2000). Endogeneity in European money demand. European Journal of Political Economy, 587–609. doi:10.1016/S0176-2680(00)00018-5