The endogenous money hypothesis: An empirical study of the euro area (1999-2010)

In this paper I examine the endogenous money supply hypothesis in the Euro Area using data from 1999 to 2010. In doing so, I make extensive use of Vector Auto regression models (VAR) with Granger causality procedure to analyze non-cointegrated series and Vector Error Correction models (VECM) for cointegrated series. The cointegration analyses reveal a bidirectional causality between loans and M1 both in the short and long run whereas loans cause variations in the M2 mainly in the short run. However, according to Granger causality test there is a one-way causality from loans to M3 but not from loans to industrial production index. The results are confirmed by adjusting the loans series for securitization activity in the Euro Area and partially support the accommodations view.