Blog Post

Money growth in the euro area is speeding up

The recent release of monetary indicators by the ECB has shown a gradual acceleration of money growth in the euro area. The growth rate of the broadest monetary aggregate calculated by the ECB, M3, was 4 percent in February 2015 compared to February 2014.  However, as the literature on aggregation-theoretic measurement of money argues (see […]

By: Date: April 2, 2015 Topic: Finance & Financial Regulation

The recent release of monetary indicators by the ECB has shown a gradual acceleration of money growth in the euro area. The growth rate of the broadest monetary aggregate calculated by the ECB, M3, was 4 percent in February 2015 compared to February 2014. 

However, as the literature on aggregation-theoretic measurement of money argues (see eg here), the simple-sum measures of money (the ECB publishes such measures) are not suitable measures of monetary developments.  This is because they simply add up various assets, which differ in the degree of their monetary and investment services. For example, cash and a two-year bank bond (which are both included in the ECB’s M3 aggregate) are quite different assets and are unlikely be perfect substitutes for money holders.

The so-called Divisia-money aggregates are derived from economic aggregation and index number theory and provide a better way to measure the stock of money. In November last year I developed a new Divisia-money dataset for the euro area, which has now been updated. The good news is that Divisia-money growth has also accelerated. The 12-month growth rate of Divisia M3 in February 2015 was 5.3 percent, which is the fastest growth rate since mid-2009 (Figure 1).  

Figure 1: 12-month percent change in euro-area M3 monetary aggregates

Does money matter in the euro area? “yes” if we use Divisia-money measures, but “not really” if we use simple-sum measures of money

Does money matter in the euro area? The answer I gave in my earlier research was a clear “yes” if we use Divisia-money measures, but “not really” if we use simple-sum measures of money (see my previous blogpost summarising my results here). 

I have updated and refined my calculations, which confirmed my earlier findings. Euro-area output and prices are estimated to respond positively to changes in Divisia-measures of money (Figure 2), but I found weaker and generally non-significant results when I used simple-sum measures of money. 

The acceleration of Divisia-money growth does not imply that the euro-area economy is out of the woods, but at least it provides a small positive signal that things are improving. 

Figure 2: Euro-area output and price response to a Divisia-money shock

Note: The solid blue line indicates the point estimate of the impulse response function of real GDP (first panel) and GDP deflator (second panel) to a shock in the monetary aggregate, while the dashed red lines indicate the boundaries of the 95 percent confidence band. The horizontal axis indicates the number of quarters after the shock (with the shock occurring in quarter 1).

The acceleration of Divisia-money growth does not imply that the euro-area economy is out of the woods, but at least it provides a small positive signal that things are improving. 

Zsolt Darvas has updated his Divisia-money dataset for the euro area.

Read more:

Money matters in the euro area


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read about event More on this topic
 

Upcoming Event

Sep
2
14:15

Monetary and macroeconomic policies at the crossroads

Bruegel Annual Meetings, Day 2- In this session we would like to discuss monetary and macroeconomic policies after Covid-19.

Speakers: Grégory Claeys, Per Callesen, Gita Gopinath, Jorge Sicilia Serrano and Lawrence H. Summers Topic: Finance & Financial Regulation Location: PALAIS DES ACADEMIES, RUE DUCALE 1
Read article More on this topic
 

Blog Post

How have the European Central Bank’s negative rates been passed on?

Negative rate cuts are not that different from ‘standard’ rate cuts. Like them, they reduce banks’ margins, but this effect does not appear to be amplified below 0%.

By: Grégory Claeys and Lionel Guetta-Jeanrenaud Topic: European Macroeconomics & Governance Date: July 7, 2021
Read article More on this topic More by this author
 

Opinion

What to expect from the ECB’s monetary policy strategy review?

Emphasis will be placed on greening monetary policy and clarifying the ECB's price stability objective, but is this enough?

By: Maria Demertzis Topic: European Macroeconomics & Governance Date: June 23, 2021
Read article More on this topic More by this author
 

Blog Post

Inflation!? Germany, the euro area and the European Central Bank

There is concern in Germany about rising prices, but expectations and wage data show no sign of excess pressures; German inflation should exceed 2% to support euro-area rebalancing but is unlikely to do so on sustained basis.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: June 9, 2021
Read article Download PDF More by this author
 

External Publication

European Parliament

What Are the Effects of the ECB’s Negative Interest Rate Policy?

This paper explores the potential effects (and side effects) of negative rates in theory and examines the evidence to determine what these effects have been in practice in the euro area.

By: Grégory Claeys Topic: European Parliament, Finance & Financial Regulation, Testimonies Date: June 9, 2021
Read article More on this topic
 

Blog Post

Emergency Liquidity Assistance: A new lease of life or kiss of death?

Use of Emergency Liquidity Assistance to prop up euro-area banks needs to be more transparent; available evidence suggests its use has not always been within the rules.

By: Francesco Papadia and Leonardo Cadamuro Topic: European Macroeconomics & Governance Date: May 28, 2021
Read about event More on this topic
 

Past Event

Past Event

After COVID-19: a most wanted recovery

This event, jointly organised with ISPI, as the National Coordinator and Chair of the T20 Italy, is part of the T20 Spring Roundtables and it will focus on strategies for a swift and sustainable economic recovery for Europe.

Speakers: Franco Bruni, Maria Demertzis, Elena Flores, Paul De Grauwe, Christian Odendahl, Miguel Otero-Iglesias and André Sapir Topic: European Macroeconomics & Governance Date: May 19, 2021
Read article More on this topic
 

Opinion

The ECB needs political guidance on secondary objectives

While EU Treaties clearly stipulate that the ECB “shall support the general objectives of the European Union”, it is not appropriate to simply stand by, wishing that the ECB will use its discretionary power to act on them. Political institutions of the EU should prioritise the secondary goals to legitimise the ECB’s action.

By: Pervenche Béres, Grégory Claeys, Nik de Boer, Panicos O. Demetriades, Sebastian Diessner, Stanislas Jourdan, Jens van ‘t Klooster and Vivien Schmidt Topic: European Macroeconomics & Governance Date: April 22, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

Africa's battle with COVID-19

How can we ensure a worldwide balanced and inclusive recovery from the Covid pandemic?

By: The Sound of Economics Topic: Global Economics & Governance Date: April 21, 2021
Read article More on this topic More by this author
 

Opinion

More Europe or less Europe?

Europe is often a ship with multiple captains. The boat moves forward in calm seas, but when the slightest wind puts it off course, it is not easy to steer that boat. It is not so much a question of more Europe rather than less, but of achieving ‘one Europe’. A ‘more-or-less Europe’ is an invitation to go nowhere.

By: Maria Demertzis Topic: European Macroeconomics & Governance Date: April 14, 2021
Read about event More on this topic
 

Past Event

Past Event

An alpine divide? Comparing economic cultures in Germany and Italy

A discussion of Italian and German macro-economic cultures and performances.

Speakers: Thomas Mayer, Patricia Mosser, Marianne Nessén, Hiroshi Nakaso, Francesco Papadia, André Sapir and Jean-Claude Trichet Topic: European Macroeconomics & Governance Date: April 13, 2021
Read article More on this topic
 

Blog Post

How has COVID-19 affected inflation measurement in the euro area?

COVID-19 has complicated inflation measurement. Policymakers need to take this into account and should look at alternative measures of inflation to understand what is actually happening in the economy.

By: Grégory Claeys and Lionel Guetta-Jeanrenaud Topic: European Macroeconomics & Governance Date: March 24, 2021
Load more posts