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The Long-run Money Demand Function: Empirical Evidence from Italy

Author

Listed:
  • Chaido Dritsaki

    (Department of Accounting and Finance, University of Western Macedonia, Kozani, Greece,)

  • Melina Dritsaki

    (University of Oxford, Oxford, UK.)

Abstract

The stability of money demand is fundamental in ensuring a county's effective monetary policy and it is being threatened when major shocks are taking place. The current paper aims to examine the factors that influence money demand in Italy for the period 1960-2017. Auto Regressive Distributed Lags (ARDL) technique and Error correction model (ECM) were applied to test for long-run and short-run coefficients respectively, while cumulative sum of recursive residuals stability test (CUSUM) evaluated parameters' stability. The results show that there is both a long- run and short- run relationship among the variables used. Real income, long run interest rate and inflation comply with the expectations of monetary theory. Furthermore, the stability tests and unit circle confirm the long- run relationship among variables. Finally, the stability condition is satisfied when money demand for Italy is estimated using the demand for narrow money (M1) for the examined period.

Suggested Citation

  • Chaido Dritsaki & Melina Dritsaki, 2020. "The Long-run Money Demand Function: Empirical Evidence from Italy," International Journal of Economics and Financial Issues, Econjournals, vol. 10(1), pages 186-195.
    • Handle: RePEc:eco:journ1:2020-01-23
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    References listed on IDEAS

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    Cited by:

    1. Michael Asiedu & Patrick Bimpong & Thomas Hezkeal Nan Khela & Benedict Arthur, 2021. "Long-Run Money Demand Function: Search for Stability in Twenty (20) Non-EMU Member Countries," Asian Journal of Economic Modelling, Asian Economic and Social Society, vol. 9(1), pages 58-87, March.

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    More about this item

    Keywords

    Money demand stability; ARDL model; Vector Error Correction Model; stability of the coefficients; Monetary aggregates; Italy;
    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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