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

Author

Listed:
  • Vittorio Daniele

    (University of Catanzaro Magna Graecia)

  • Pasquale Foresti

    (The London School of Economics and Political Science)

  • Oreste Napolitano

    (University of Naples Parthenope)

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.

Suggested Citation

  • Vittorio Daniele & Pasquale Foresti & Oreste Napolitano, 2017. "The stability of money demand in the long-run: Italy 1861–2011," Cliometrica, Springer;Cliometric Society (Association Francaise de Cliométrie), vol. 11(2), pages 217-244, May.
    • Handle: RePEc:spr:cliomt:v:11:y:2017:i:2:d:10.1007_s11698-016-0143-8
    DOI: 10.1007/s11698-016-0143-8
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    More about this item

    Keywords

    Italy; Money demand stability; Monetary aggregates; Exchange rate; ARDL;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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