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The stability of money demand in the long-run: Italy 1861–2011

Daniele, Vittorio and Foresti, Pasquale and Napolitano, Oreste (2017) The stability of money demand in the long-run: Italy 1861–2011. Cliometrica, 11 (2). pp. 217-244. ISSN 1863-2505

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Identification Number: 10.1007/s11698-016-0143-8

Abstract

Money demand stability is a crucial issue for monetary policy efficacy, and it is particularly endangered when substantial changes occur in the monetary system. By implementing the ARDL technique, this study intends to estimate the impact of money demand determinants in Italy over a long period (1861–2011) and to investigate the stability of the estimated relations. We show that instability cannot be excluded when a standard money demand function is estimated, irrespectively of the use of M1 or M2. Then, we argue that the reason for possible instability resides in the omission of relevant variables, as we show that a fully stable demand for narrow money (M1) can be obtained from an augmented money demand function involving real exchange rate and its volatility as additional explanatory variables. These results also allow us to argue that narrower monetary aggregates should be employed in order to obtain a stable estimated relation.

Item Type: Article
Official URL: http://link.springer.com/journal/11698
Additional Information: © 2016 The Authors © CC BY 4.0
Divisions: European Institute
Subjects: H Social Sciences > HC Economic History and Conditions
H Social Sciences > HG Finance
JEL classification: C - Mathematical and Quantitative Methods > C2 - Econometric Methods: Single Equation Models; Single Variables > C22 - Time-Series Models
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E41 - Demand for Money
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy (Targets, Instruments, and Effects)
Sets: Departments > European Institute
Collections > Economists Online
Date Deposited: 25 Jul 2016 10:37
Last Modified: 23 Jun 2017 10:55
URI: http://eprints.lse.ac.uk/id/eprint/67219

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