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

  • Massimo Caruso

    ()

    (Bank of Italy)

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    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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    File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2006/2006-0576/tema_576.pdf
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    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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    Web page: http://www.bancaditalia.it

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    2. Angelini, P. & Hendry, D.F. & Rinaldi, R., 1993. "An Econometric Analysis of Money Demand in Italy," Papers 219, Banca Italia - Servizio di Studi.
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    15. Massimo Caruso, 2004. "Infrequent Shocks, Output Persistence and Economic Growth," Manchester School, University of Manchester, vol. 72(2), pages 243-260, 03.
    16. Vogelsang, Timothy J & Perron, Pierre, 1998. "Additional Tests for a Unit Root Allowing for a Break in the Trend Function at an Unknown Time," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 1073-1100, November.
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    19. Choudhry, Taufiq, 1996. "Real stock prices and the long-run money demand function: evidence from Canada and the USA," Journal of International Money and Finance, Elsevier, vol. 15(1), pages 1-17, February.
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