Heterogeneity in Money Holdings Across Euro Area Countries: The Role of Housing

By Ralph Setzer, Paul van den Noord, Guntram B. Wolff. Social Science Research Network, 2011

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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.

Subfields: Economics and Econometrics, Finance

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