Heterogeneity in money holdings across euro area countries: The role of housing

In this paper we examine why monetary aggregates of euro area Member States have developed differently since the inception of the euro. We derive a money demand equation that incorporates housing wealth and collateral as well as substitution effects on real money holdings. Empirically, we show that cross-country differences in real balances are determined not only by income differences, a standard determinant of money demand, but also by house price developments. Higher house prices and higher user costs of housing are both associated with larger money holdings. Country-specific money holdings are also connected with structural features of the housing market. ► House prices explain cross-country differences in money demand in the euro area. ► This role of housing was smaller before the creation of the euro in 1999. ► This is due to the smaller role of intra-area capital flows before 1999.