No. 267 - Money Demand in Italy: A System Approach

Adopting a system approach, the paper evaluates results of empirical research on money demand recently obtained at the Bank of Italy in a single equation context. We present a small linear econometric model built around three long-run relations, one of which is interpreted as a money demand equation. The structural model, which encompasses the associated VAR, supports the results in the single equation framework. The model suggests, in particular, that it is appropriate within such a framework to condition real money balances on the opportunity cost (the T. bill rate) and that own and alternative interest rate elasticities can be identified. The model is also used for simulations, tracing the response of the money stock to all structural disturbances.