The Stability of Money Demand in the Long Run: An Empirical Study from Italy

The stability of money demand is a crucial issue for the effectiveness of monetary policy in each country and is being threatened when important changes are taking place in its monetary policy. Applying ARDL technique and error correction model (ECM) developed by Pesaran et al. (2001), this paper aims to examine the factors that influence money demand in Italy for the period 1960-2017. The results of ARDL technique and ECM show that there is both a long-run and short-run relationship among variables used. Real income, long-run interest rate, and inflation comply with the expectations of monetary theory. Finally, the results of CUSUM and CUSUMSQ stability tests and unit circle confirm the long-run relationship among variables and also that the stability condition is satisfied when money demand for Italy is estimated with M-1 variable for the examined period.