European Economy. Economic Papers
Ralph Setzer, Paul van den Noord, Guntram B. Wolff (European Commission)
Heterogeneity in money holdings across euro area countries: the role of housing 
[915 KB]
(European Economy. Economic Papers. 407. February 2010.
Brussels. PDF. 30pp. Tab. Graph. Bibliogr. Free.)
KC-AI-10-407-EN-N ISBN: 978-92-79-14893-4 ISSN: 1725-3187
Summary for non-specialists [31 KB]
In this paper we examine why monetary aggregates of euro area Member States have developed differently since the inception of the euro. We derive a money demand equation that incorporates housing wealth and collateral as well as substitution effects on real money holdings. Empirically, we show that cross-country differences in real balances are determined not only by income differences, a standard determinant of money demand, but also by house price developments.
Higher house prices and higher user costs of housing are both associated with larger money holdings. Country-specific money holdings are also connected with structural features of the housing market.
JEL classification: E41, E51, E52
doi:doi 10.2765/40813