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

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

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Massimo Caruso () (Bank of Italy)

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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Paper provided by Bank of Italy, Economic Research Department 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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Find related papers by JEL classification:
E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
N14 - Economic History - - Macroeconomics and Monetary Economics; Growth and Fluctuations - - - Europe: 1913-
N24 - Economic History - - Financial Markets and Institutions - - - Europe: 1913-

This paper has been announced in the following NEP Reports:

NEP-ALL-2006-05-27 (All new papers)
NEP-CBA-2006-05-27 (Central Banking)
NEP-FMK-2006-05-27 (Financial Markets)
NEP-MAC-2006-05-27 (Macroeconomics)
NEP-MON-2006-05-27 (Monetary Economics)

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