Does Money Matter in the Euro Area?

This paper examines the relationship between money and output, and between money and inflation in the euro area in the context of an optimizing new Keynesian type model. Regarding the first relation, the empirical analysis has indicated that the growth rate of the real money supply M3 in the preceding period has information content that helps predict movements in the output gap even after the history of output gap and the real interest rate are taken into account. Regarding the second relation, the analysis has indicated that the gap of the real money supply M3 in the preceding period has information content that helps predict movements in the current inflation even after the history of inflation and the current oil price are taken into account. The estimated relationships are stable before the eruption of the recent financial crisis, but exhibit structural instability when the sample incorporates the post-crisis period.