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Stock market fluctuations and money demand in Italy, 1913-2003

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  • Massimo Caruso

    ()
    (Bank of Italy)

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    Abstract

    This paper examines the impact of stock market fluctuations on money demand in Italy taking a long-run perspective. The empirical findings suggest that stock market fluctuations contribute to explain temporary movements in the liquidity preference, rather than its secular patterns. Overall, a positive association emerges between an index of stock market prices that includes dividends and real money balances; however, the estimated long-run relationship is unstable. In a dynamic, short-term specification of money demand the estimated coefficient on deflated stock prices is positive, thus compatible with a wealth effect, in the years 1913-1980, while in the last two decades a substitution effect prevailed and the correlation between money and share prices has been negative. This is likely to reflect a change in financial structure and the increasing role of opportunity costs defined over a wider range of assets. These results are confirmed by data on stock market capitalisation. Moreover, in the recent period stock market turnover and money growth are positively correlated.

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    Bibliographic Info

    Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 576.

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    Date of creation: Feb 2006
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    Handle: RePEc:bdi:wptemi:td_576_06

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    Keywords: long-run money demand function; asset prices volatility;

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    Cited by:
    1. Bruce Morley, 2009. "A Comparison of Two Alternative Monetary Approaches to Exchange Rate Determination over the Long-Run," International Econometric Review (IER), Econometric Research Association, vol. 1(2), pages 63-76, April.

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