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

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Listed author(s):
  • 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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    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
    Handle: RePEc:bdi:wptemi:td_576_06
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    Web page: http://www.bancaditalia.it

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

    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; Industrial Structure; Growth; Fluctuations - - - Europe: 1913-
    • N24 - Economic History - - Financial Markets and Institutions - - - Europe: 1913-

    This paper has been announced in the following NEP Reports:

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    1. Stefano Neri, 2004. "Monetary policy and stock prices: theory and evidence," Temi di discussione (Economic working papers) 513, Bank of Italy, Economic Research and International Relations Area.
    2. Massimo Caruso, 2001. "Stock prices and money velocity: a multi-country analysis," Empirical Economics, Springer, vol. 26(4), pages 651-672.
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    9. repec:bla:restud:v:57:y:1990:i:1:p:99-125 is not listed on IDEAS
    10. Bruggeman, Annick & Donati, Paola & Warne, Anders, 2003. "Is the demand for euro area M3 stable?," Working Paper Series 255, European Central Bank.
    11. Chaudhuri, Kausik & Wu, Yangru, 2003. "Random walk versus breaking trend in stock prices: Evidence from emerging markets," Journal of Banking & Finance, Elsevier, vol. 27(4), pages 575-592, April.
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    16. Panetta, F. & Violi, R., 1999. "Is there an Equity Premium Puzzle in Italy? A Look at Asset Returns, Consumption and Financial Structure Data Over the Last Century," Papers 353, Banca Italia - Servizio di Studi.
    17. Massimo Caruso, 2004. "Infrequent Shocks, Output Persistence and Economic Growth," Manchester School, University of Manchester, vol. 72(2), pages 243-260, 03.
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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.
    2. Ahmad Baharumshah & Siew-Voon Soon, 2015. "Demand for broad money in Singapore: does wealth matter?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 39(3), pages 557-573, July.
    3. repec:spr:cliomt:v:11:y:2017:i:2:d:10.1007_s11698-016-0143-8 is not listed on IDEAS
    4. Vittorio Daniele & Pasquale Foresti & Oreste Napolitano, 2017. "The stability of money demand in the long-run: Italy 1861–2011," Cliometrica, Springer;Cliometric Society (Association Francaise de Cliométrie), vol. 11(2), pages 217-244, May.

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