Asymmetries of Demand for Money Functions Amongst EMU Countries

Résumé 0

: The European Central Bank (ECB) uses a "two pillar" strategy to achieve its objective of price stability within the euro area. Even in the absence of explicit monetary targeting, stability between money and prices still affects the role of monetary aggregates in the conduct of monetary policy. The stability of the money-price link depends ultimately on the properties of the demand-for-money relationship. This paper deals with the demand-for-money functions in individual EMU countries, whether such demand functions can be identified and, where identified, whether the functions are broadly similar in different countries. A change in the ECB interest rate should trigger the same change in the short-term interest rate in all EMU countries. As a consequence, the cost of borrowing would also change, which in turn would affect the demand for bank loans. The size of this resulting effect may vary from country to country, depending on the institutional setting, and could give rise to asymmetries in the monetary mechanism. The authors find significant differences in the interest rate semi-elasticities from country to country within the EMU, which, the authors argue, could pose serious problems in the conduct of the ECB' s common monetary policy.