THE STABILITY OF THE DEMAND FOR MONEY in the EURO AREA

The objective of the paper is to investigate the stability properties of the European Money Demand function by means of multivariate time series modelling for the time period 1980 -2010 using aggregated data of EU17, European Union member states which use the euro as their currency. A cointegration analysis identifies only one stable long-run relationship within a set of four macroeconomic variables, which can be interpreted as a money demand function. Empirical analysis suggests that the EU wide money demand function is not stable. According to the previous empirical literature on money demand, the instability of the money demand function can be due to the nonlinearity of the relationship. the nonlinearity in the short-run dynamics of the money demand function estimation has been investigated