Monetary policy implementation and money demand instability during the financial crisis

Abstract

The author focuses on the money endogeneity in the context of common monetary policy implementation in the euro area. The empirical analysis shows money demand function instability during the financial crisis. The instability is described by decrease in credit money creation and money velocity changes. The cointegration tests identifed long-run positive relationship between monetary aggregates and economic activity. Concurrently, the economic activity is treated to be weakly exogenous in the model. The conclusions are discussed with Postkeynesians' assumption, that central banks cannot fix the stock of money in a country. The causality is directed from economic activity to money demand.