The impact of uncertainty on money demand in the UK, US and Euro area

Rakesh K. Bissoondeeal; Jane M. Binner; Michail Karoglou

doi:10.1080/1351847x.2023.2204194

The impact of uncertainty on money demand in the UK, US and Euro area

Rakesh K. Bissoondeeal, Jane M. Binner, Michail Karoglou

Research output: Contribution to journal › Article › peer-review

Abstract

We estimate money demand functions for the UK, the Euro area and the US using Divisia monetary aggregates and investigate the extent to which the uncertainty caused by Brexit and Covid have affected these relationships. Our cointegrated VAR analysis shows that for all three economies Brexit and/or Covid have had some impact on the stability of money demand functions. We find that including a measure of stock market volatility in the money demand specifications helps re-establish stability of the models, particularly for the UK and the Euro area. We also explore the uncertainty and money demand relationship in the context of a Markov-switching model. We find that the effect of uncertainty on the demand for money is more pronounced during periods of heightened uncertainty. The findings of this study lend support to studies calling for Divisia aggregates to be given a more prominent role in policymaking, especially when interest rates are in the zero lower bound environment and are less informative about the stance of monetary policy.

Original language	English
Pages (from-to)	1866-1884
Number of pages	19
Journal	European Journal of Finance
Volume	29
Issue number	16
Early online date	23 May 2023
DOIs	https://doi.org/10.1080/1351847x.2023.2204194
Publication status	Published - 2023

Bibliographical note

This is an Accepted Manuscript of an article published by Taylor & Francis in The European Journal of Finance on 23/05/2023. It is deposited under the terms of the Creative Commons Attribution-NonCommercial License (http://creativecommons.org/licenses/by-nc/4.0/) which permits non-commercial re-use, distribution, and reproduction in any medium, provided the original work is properly cited, available at: https://doi.org/10.1080/1351847X.2023.2204194

Keywords

Economics, Econometrics and Finance (miscellaneous)
Divisia
Money demand
Markov switching VAR
uncertainty

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title = "The impact of uncertainty on money demand in the UK, US and Euro area",

abstract = "We estimate money demand functions for the UK, the Euro area and the US using Divisia monetary aggregates and investigate the extent to which the uncertainty caused by Brexit and Covid have affected these relationships. Our cointegrated VAR analysis shows that for all three economies Brexit and/or Covid have had some impact on the stability of money demand functions. We find that including a measure of stock market volatility in the money demand specifications helps re-establish stability of the models, particularly for the UK and the Euro area. We also explore the uncertainty and money demand relationship in the context of a Markov-switching model. We find that the effect of uncertainty on the demand for money is more pronounced during periods of heightened uncertainty. The findings of this study lend support to studies calling for Divisia aggregates to be given a more prominent role in policymaking, especially when interest rates are in the zero lower bound environment and are less informative about the stance of monetary policy.",

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note = "This is an Accepted Manuscript of an article published by Taylor & Francis in The European Journal of Finance on 23/05/2023. It is deposited under the terms of the Creative Commons Attribution-NonCommercial License (http://creativecommons.org/licenses/by-nc/4.0/) which permits non-commercial re-use, distribution, and reproduction in any medium, provided the original work is properly cited, available at: https://doi.org/10.1080/1351847X.2023.2204194",

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doi = "10.1080/1351847x.2023.2204194",

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N2 - We estimate money demand functions for the UK, the Euro area and the US using Divisia monetary aggregates and investigate the extent to which the uncertainty caused by Brexit and Covid have affected these relationships. Our cointegrated VAR analysis shows that for all three economies Brexit and/or Covid have had some impact on the stability of money demand functions. We find that including a measure of stock market volatility in the money demand specifications helps re-establish stability of the models, particularly for the UK and the Euro area. We also explore the uncertainty and money demand relationship in the context of a Markov-switching model. We find that the effect of uncertainty on the demand for money is more pronounced during periods of heightened uncertainty. The findings of this study lend support to studies calling for Divisia aggregates to be given a more prominent role in policymaking, especially when interest rates are in the zero lower bound environment and are less informative about the stance of monetary policy.

AB - We estimate money demand functions for the UK, the Euro area and the US using Divisia monetary aggregates and investigate the extent to which the uncertainty caused by Brexit and Covid have affected these relationships. Our cointegrated VAR analysis shows that for all three economies Brexit and/or Covid have had some impact on the stability of money demand functions. We find that including a measure of stock market volatility in the money demand specifications helps re-establish stability of the models, particularly for the UK and the Euro area. We also explore the uncertainty and money demand relationship in the context of a Markov-switching model. We find that the effect of uncertainty on the demand for money is more pronounced during periods of heightened uncertainty. The findings of this study lend support to studies calling for Divisia aggregates to be given a more prominent role in policymaking, especially when interest rates are in the zero lower bound environment and are less informative about the stance of monetary policy.

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The impact of uncertainty on money demand in the UK, US and Euro area

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