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

Listed author(s):
  • 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.

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File URL: http://link.springer.com/10.1007/s11698-016-0143-8
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Article provided by Springer & Cliometric Society (Association Francaise de Cliométrie) in its journal Cliometrica.

Volume (Year): 11 (2017)
Issue (Month): 2 (May)
Pages: 217-244

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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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