Abstract:
This paper develops a constant, data-coherent, error correction model for broad money demand (M3)
in Greece. This model contributes to a better understanding of the effects of monetary policy in
Greece and of the portfolio consequences of financial innovation in general. The broad monetary
aggregate M3 was targeted until recently, and current monetary policy still uses such aggregates as
guidelines, yet analysis of this aggregate has been dormant for over a decade.
In spite of large fluctuations in the inflation rate, introduction of new financial instruments, and
liberalization of the financial system, the estimated model is remarkably stable. The dynamics of
money demand are important, with price and income elasticities being much smaller in the short run
than in the long run.
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