A Panel Cointegration Analysis of the Euro area money demand

Abstract: Using panel cointegration structure for eleven European monetary union (EMU) countries we check Driscoll money demand model (where three different types of variables are used) that the variables of this model has a long run relationship or not. These variables are Real M3, Real GDP and opportunity cost. As opportunity cost we use long term interest rate, deposit interest rate and spread between long term and short term interest rate. Eleven countries (which are the founding members of EMU) quarterly data are taken from Eurostat and OECD website begin from 1999‐Q1 to 2009‐Q3. With the help of Eviews 7 software two types of panel unit root tests (common unit root processes and individual unit root processes) and three types of panel cointegration tests are used to analyze quarterly observations. In both types of panel unit root tests, results suggest that the first difference of all the series is stationary. For the panel cointegration tests, results support the stability of long run money demand in the Euro area.