Demand for money in the Euro area

We analyzed the stability of the money demand function using panel data from January 1999 through March 2006, covering the 11 EU countries (Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, and Spain). First, we found that the money demand function was stable with respect to M3. This arguably supports the suitability of the ECB's focus on M3 money supply in its monetary policy. Second, the stability of the money demand function was recognized with respect not only to M3, but also to M1 and M2. Accordingly, the ECB's adoption of M1 or M2 growth as a reference value should probably be considered depending on how conditions change going forward.