We analyze the relationship between M3 growth and inflation within an error correction framework including also the output gap, the 3-mo EURIBOR, and the 10-yr government bond yield. We find robust cointegration between money growth and inflation. Shocks in M3 growth account for up to 30% of the...

This paper analyzes the recently documented instability of money demand in the euro area in the framework of a Markov switching trend model. First, we consider a standard flexible price model with stable money demand, rational expectations, and an exogenous income-money ratio which follows a...

We study the determinants of sovereign bond spreads in the euro area since the introduction of the euro. We show that an aggregate risk factor is a main driver of spreads. This factor also plays an important indirect role for risk spreads through its interaction with the size and structure of...