Real stock prices and the long-run demand for money in Germany

John Thornton

Applied Financial Economics, 1998, vol. 8, issue 5, 513-517

Abstract: The Johansen procedure of cointegration is used to test the hypothesis of a stationary relationship between real money balances, real income, interest rates and real stock prices in Germany for the period 1960-89, and an error correction representation of the data is used to explain the short-run dynamics of the demand for money. Results indicate that: real stock prices have a significant and positive wealth effect on the long-run demand for real M1 balances; there are feedback effects between real money balances and interest rates; and unidirectional Granger-causality runs from real income to interest rates, from interest rates to real stock prices, and from real money balances to real income.

Date: 1998
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DOI: 10.1080/096031098332817

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