Modeling Monetary Trends in Italy Using Historical Data: The Demand for Broad Money 1861—1990

Abstract

In this paper we estimate a stable demand for money relationship for Italy using a long series I$ historical data. We extend previously available data sets to obtain a sample for the years 1861 to 1990 and use cointegration analysis and two-stage estimation procedures to obtain a dynamic modelfbr M2 demand. By employing a small number I$ explanatory variables and a nonlinear error-correction model we find a stable demand for money relationship. Our model incorporates sign@cant i@ation and interest rate efiects, in contrast to previous studies I$ this type.

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

“…It is worth noticing that the estimated interest rate elasticity is negative in the great majority of the existing literature. Concerning previous studies on Italy, our results on interest rate elasticities are similar to the ones reported in Sarno (1999) and Muscatelli and Spinelli (1996).…”

“…As a result, the existing literature proposes different and sometimes contrasting evidences. Muscatelli and Spinelli (1996), with a single equation estimation based on annual data covering the period 1861-1990, are able to detect one cointegrating relation and to estimate a stable demand for money for the entire period. The same result is obtained by Sarno (1999).…”

Adjustment costs and nonlinear dynamics in the demand for money: Italy, 1861-1991

“…One of the issues that has received widespread attention by researchers has been concerned with modelling money demand using low frequency data for relatively long sample periods, although long samples may potentially be inappropriate because of regime shifts, financial innovation and structural changes, hence requiring particularly careful testing and modelling procedures (e.g. see Friedman and Schwartz, 1982;Hendry and Ericsson, 1991a,b;Laidler, 1993Laidler, , 1997Siklos, 1993;Muscatelli and Spinelli, 1996;Bordo et al, 1997;Bordo and Jonung, 1998;Ericsson et al, 1998).…”

Evidence on nonlinear error correction in money demand: the case of Taiwan

“…However, some investigators, such as Muscatelli and Spinelli (1996), and Wolters et al (1998), argue that the error correction to the short-run dynamics may not follow a linear process. For instance, the variations in money are more volatile in an economic downturn than in an upswing.…”

“…Several studies in the literature have applied these micro-based theoretical models to their empirical work. Muscatelli and Spinelli (1996), and Ericsson et al (1998) include a cubic error-correction term as a regressor in their study of the money demand function in Italy and in the United Kingdom, respectively. They ® nd that the nonlinear error-correction speci® cation better describes the short-run dynamics and improves the overall goodness-of-® t. Wolters et al (1998), andLutkepohl et al (1997) apply a smooth transition errorcorrection model (STECM) to investigate the issues of instability and nonlinearity of money demand in Germany.…”