Estimating Demand for Money within the European Union Area

This paper investigates the issues of stability, predictability and interestsensitivity of both the long and short run demand for money within the European Union employing quarterly data over the period 1980-1998. The model is closely based on that estimated by Friedman and Schwartz (1982). The stability of long and short-run money demand within and out of the estimation period is investigated employing a multivariate framework. To test for the existence and the stability of money demand various unit-root pretests and a vector error-correction model are employed. A long-run money demand function is found to exist and the importance of short-run deviations is presented. The empirical evidence suggests the existence of a stable money demand function at a European level both in the long and short-run periods and the policy implications of such a relationship are presented.