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.

Publication DOI: https://doi.org/10.1080/1351847x.2023.2204194
Divisions: College of Business and Social Sciences > Aston Business School > Economics, Finance & Entrepreneurship
College of Business and Social Sciences > Aston Business School > Centre for Personal Financial Wellbeing
College of Business and Social Sciences > Aston Business School
Additional Information: 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
Uncontrolled Keywords: Economics, Econometrics and Finance (miscellaneous),Divisia,Money demand,Markov switching VAR,uncertainty,Economics, Econometrics and Finance (miscellaneous)
Publication ISSN: 1466-4364
Last Modified: 23 May 2024 07:24
Date Deposited: 06 Jun 2023 10:22
Full Text Link:
Related URLs: https://www.tan ... rnalCode=rejf20 (Publisher URL)
PURE Output Type: Article
Published Date: 2023
Published Online Date: 2023-05-23
Accepted Date: 2023-03-28
Submitted Date: 2022-01-31
Authors: Bissoondeeal, Rakesh K. (ORCID Profile 0000-0003-3950-0507)
Binner, Jane M.
Karoglou, Michail (ORCID Profile 0000-0002-6730-504X)

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Version: Accepted Version

Access Restriction: Restricted to Repository staff only until 23 November 2024.

License: Creative Commons Attribution Non-commercial


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