A portfolio demand approach for broad money in the euro area

The aim of the paper is to reassess the issue of money demand stability by estimating a portfolio demand approach for broad money M3 in the euro area covering the sample 1999 to 2013. The question is relevant, since in view of the massive shocks observed since the start of the financial crisis in 2007 relationships may have changed. Overall, the paper finds that the main components of euro area M3 are largely stable and can be explained by fundamental factors such as a transaction variable and opportunity costs. Nevertheless, the analysis detects some instabilities originating from the demand for currency in circulation linked to the euro cash changeover and for marketable instruments in an environment of very low interest rates.