Broad money demand and financial liberalization in Greece

This paper develops a constant, data-coherent, equilibrium correction model for broad money demand (M3) in Greece over 1976-1994. The aggregate M3 was targeted until recently, and current monetary policy still uses such aggregates as guidelines. In spite of financial innovation, financial liberalization, and large fluctuations in the inflation rate, the estimated model is remarkably stable. Dynamics are important, with price and income elasticities being much smaller in the short run than in the long run. The model provides a better understanding of the portfolio consequences of financial innovation and the effects of monetary policy in Greece.