Money Demand in Italy: A Few More Results *

Abstract

I I n the empirical literature on the demand for money in Italy several important issues remain to be settled; they concern stability, simultaneity, the nature of the adjustment process, the role of the domestic rate of inflation and that of foreign interest rates (Calliari, Spinelli and Verga, 1981). The purpose of the paper is to consider these issues.1Our major conclusions are as follows. A Feige (1967)-type of equation with permanent income and partial adjustment out-performs simpler models ; actual money balances adjust fairly quickly, whereas the gap between actual and permanent income takes two years to close. Three proxies for the opportunity cost of holding money, a long-term domestic interest rate, the inflation rate, and the uncovered Eurodollar rate, turn out to affect desired money balances in a statistically significant fashion. Nothing changes when polynomial distributed lags replace the Koyck transformations. Finally, no serious stability problem is encountered over the sample period 1975(2)-1980(1). I1Throughout t.he paper capital letters indicate natural values, small letters natural logarithms, L is the lag operator, p the first order autocorrelation coefficient; optimum quantities are denoted by *, and the value of a parameter which has been apriori constrained appears in square brackets. *Manuscript received 18.6.82; final version received 24.6.83.lHere we will not report on the empirical results concerning simultaneity. They are available on request from the authors. Basically we found that a three-equation simultaneous system (money demand, money supply and demand for unborromed reserves) generates the same results for money demand as a single equation.

Cointegration, Financial Innovation and Modelling the Demand for Money in Italy*

“…In addition, as all the variables in equation (9) are I(0) (see Table 2), the statistics reported will have standard distributions. Note also that there is a significant negative total inflation effect on the demand for real balances, which again conforms with earlier evidence on the demand for money in Italy (see Calliari et al, 1984;Dooley and Spinelli, 1989;Papi, 1989).…”