Abstract:
The European Central Bank (ECB) assigns greater weight to the role of money in its monetary policy
strategy than most, if not all, other major central banks. Nevertheless, reflecting the view that the
demand for money became unstable in the early 2000s, some commentators have reported that the
ECB has “downgraded” the role of money demand functions in its strategy. This paper explains the
ECB’s monetary policy strategy and shows the considerable influence of Milton Friedman’s contributions
on the formulation of that strategy. The paper also provides new evidence on the stability of euro area
money demand. Following a conjecture made by Friedman (1956), the authors assign a role to uncertainty
in the money demand function. They find that although uncertainty is nonstationary and subject
to wide swings, it is nonetheless mean reverting and has substantial effects on the demand for money.
