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Stock prices and money velocity: a multi-country analysis

Author

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  • Massimo Caruso

    (Banca d'Italia, Rome Main Branch - Economic Research Unit, 00186 Rome, Italy)

Abstract

What kind of information do stock prices offer for predicting velocity? This paper develops previous work by Milton Friedman for the US economy and shows that in a panel of 25 countries a wealth effect derived from the stock market has negatively influenced the ratio of nominal income to a broad definition of money. Taking quarterly data for the period 1961-1998, the relationship holds in Japan, the UK and Switzerland; in Italy a substitution effect (away from money) has also been operating. Overall, these empirical findings indicate the presence of systematic influences of stock price fluctuations on money velocity and suggest that the repercussions of asset inflation and deflation on the behavior of monetary aggregates should be monitored.

Suggested Citation

  • Massimo Caruso, 2001. "Stock prices and money velocity: a multi-country analysis," Empirical Economics, Springer, vol. 26(4), pages 651-672.
  • Handle: RePEc:spr:empeco:v:26:y:2001:i:4:p:651-672 Note: received: July 1998/Final version received: November 2000
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    References listed on IDEAS

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    1. Joseph G. Altonji & Todd E. Elder & Christopher R. Taber, 2005. "Selection on Observed and Unobserved Variables: Assessing the Effectiveness of Catholic Schools," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 151-184, February.
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    Citations

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    Cited by:

    1. Massimo Caruso, 2006. "Stock market fluctuations and money demand in Italy, 1913-2003," Temi di discussione (Economic working papers) 576, Bank of Italy, Economic Research and International Relations Area.
    2. Carstensen, Kai, 2004. "Is European Money Demand Still Stable?," Kiel Working Papers 1179, Kiel Institute for the World Economy (IfW).
    3. Carstensen, Kai, 2006. "Stock Market Downswing and the Stability of European Monetary Union Money Demand," Journal of Business & Economic Statistics, American Statistical Association, pages 395-402.
    4. Hunter, John & Menla Ali, Faek, 2014. "Money demand instability and real exchange rate persistence in the monetary model of USD–JPY exchange rate," Economic Modelling, Elsevier, vol. 40(C), pages 42-51.
    5. Cronin, David, 2014. "The interaction between money and asset markets: A spillover index approach," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 185-202.
    6. Baharumshah, Ahmad Zubaidi & Mohd, Siti Hamizah & Mansur M. Masih, A., 2009. "The stability of money demand in China: Evidence from the ARDL model," Economic Systems, Elsevier, vol. 33(3), pages 231-244, September.
    7. Guglielmo Maria Caporale & Alaa M. Soliman, 2013. "Stock Prices and Monetary Policy: An Impulse Response Analysis," International Journal of Economics and Financial Issues, Econjournals, vol. 3(3), pages 701-709.
    8. repec:kap:openec:v:28:y:2017:i:5:d:10.1007_s11079-017-9468-6 is not listed on IDEAS

    More about this item

    Keywords

    stock market fluctuations; asset prices volatility; demand for money; monetary policy;

    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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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