The Early Stages of Financial Innovation and Money Demand in France and Italy *

Abstract

and FRANC0 SPINELLIt Unioersita' degli Studi di Trento I INTRODUCTIONThe impact of financial innovation and deregulation on the ability of the authorities of the industrialized countries to pursue effectively a strategy of monetary targeting has varied from country to country. In some cases, the authorities seem to have had no major problems in achieving their preannounced monetary targets; in other cases, the targets were not met, the monetary aggregates were redefined and the strategy of monetary targeting was discontinued or substantially modified. In the literature on the relationships among financial innovation and deregulation, money demand and monetary targeting, there have been a number of explanations of why problems with monetary targeting arise. However, these discussions have focused on a limited set of topics and have not considered a number of important factors. There has been a tendency to overlook the fact that, at least in their early stages, financial innovations are largely endogenous to past and present monetary policies and that both the kind and the tempo of financial deregulation are under the control of the authorities. Moreover, most of the literature has focused only on what are regarded as the major problem cases like the United States, Canada, and the United Kingdom. In particular, there are no studies that combine, in a compact way, a description of the forces starting and driving the processes of financial innovation and deregulation in countries other than those indicated above with an empirical analysis of the stability of their money demand. This paper fiffs a portion of this gap by considering the experiences of France and Italy.Our analysis suggests that, for both France and Italy, the most important factor that initially drove the processes of financial innovation and deregulation appears to have been the need to finance large budget deficits.Manuscript received 8.5.86; hnal version received 11.1.88. t W e thank

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

“…First, and most importantly, there appears to be an important role for inflation in the demand for money. This confirms the significant role for inflation found in the studies on post-World War I1 data by Dooley and Spinelli [1989], Muscatelli and Papi [19901 and Bagliano et al [19921, but differs from the results obtained by Spinelli [1980] on a longer historical data set. Second, with the exception of the nonlinear ECM terms, the estimated model has a relatively simple dynamic structure, as most explanatory variables (except real income growth) only enter the equation with a simple lag structure.…”

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).…”

“…A second important development was the use, from 1980 onwards, of longer-term government debt, the Certificati di Credit0 del Tesoro (CCT). Although these longer-term debt instruments were introduced in an attempt to lengthen the average maturity of the outstanding stock of government debt, they are generally considered to be good money substitutes on account of their liquidity.2 One of thg interesting features of 'See Dooley and Spinelli (1989) for an excellent account of the various features of BOTs and…”

International comparisons of money demand

“…Dooley and Spinelli (1989) applied this method to France and Italy; they found overpredictions for France that were in line with the growth of newly introduced assets, while for Italy the overpredictions were too large to be explained in that manner. 19.…”