Asymmetries of Demand for Money Functions Amongst EMU Countries

Résumé 0

"The European Central Bank (ECB) uses a “two pillar” strategy to achieve itsobjective of price stability within the euro area. Even in the absence of explicitmonetary targeting, stability between money and prices still affects the role ofmonetary aggregates in the conduct of monetary policy. The stability of the moneypricelink depends ultimately on the properties of the demand-for-moneyrelationship. This paper deals with the demand-for-money functions in individual EMU countries, whether such demand functions can be identified and, whereidentified, whether the functions are broadly similar in different countries. Achange in the ECB interest rate should trigger the same change in the short-terminterest rate in all EMU countries. As a consequence, the cost of borrowing wouldalso change, which in turn would affect the demand for bank loans. The size ofthis resulting effect may vary from country to country, depending on theinstitutional setting, and could give rise to asymmetries in the monetarymechanism. The authors find significant differences in the interest rate semielasticitiesfrom country to country within the EMU, which, the authors argue,could pose serious problems in the conduct of the ECB’s common monetary policy."