The Euro area long-run M3 demand function

In this thesis, I examine the long-term determinants of the Euro area long-run M3 demand function. I analyse the influence of the variables that have been assumed to impact the Euro area M3 demand function instability since 2001Q3. Based on a time series analysis and a Johansen VECM approach, the following conclusions emerge. The income variable real GDP, the wealth variable real house prices, an opportunity cost measure calculated as the spread between the Euro area long-term market interest rate and money’s own rate of return, and the spread between the Euro area and U.S. price-earnings ratios representing the international portfolio allocation effect, exert a significant influence on the demand for Euro area M3. On the other hand, three stock market development variables, two macroeconomic uncertainty measures, the inflation rate, the spread between the Euro area short term market interest rate and money’s own rate of return, and the spread between the Euro area and U.S. long-term market interest rates do not have a substantial impact on the demand for Euro area M3. With the exception of the recent financial crisis, these findings are confirmed by a monetary overhang measure over the 1980Q1 - 2010Q3 period.