The Stability of European Money Demand: An Investigation of M3H

The paper assesses the stability and predictive performance of a European money demand function as compared to national money demand functions. With respect to the explanatory accuracy, the national functions perform better than the aggregated function. Examination of the residuals of the national money demand equations indicates that currency substitution is not the major cause for the stability of the aggregated money demand function. The aggregate relation mainly seems to reflect German money demand. This conclusion is supported by the instability of aggregated money demand resulting from the exclusion of Germany from the aggregate. Copyright Kluwer Academic Publishers 1997demand for money, European Monetary Union, cointegration,