Money demand instability, expectations and policy regimes: A note on the case of Italy: 1964-1986

This paper compares the stability performance of feedback and feedforward specifications of the demand for M2 in Italy over the period 1962-1986. A clear change in the monetary policy regime occurred in 1969/1970, together with marked breaks in the processes generating several relevant variables in the mid-'70s, making this period particularly appropriate for the investigation of the potential role of expectations. Our main results show that the feedback specification suffers from instability at both relevant dates, whereas the feedforward specification is remarkably stable during the policy regime change, but displays signs of instability during the mid-'70s. © 1992.