Real stock prices and the long-ran money demand function: Evidence from Canada and the USA

This paper investigates the relationship between stock prices and the long-run money demand function in Canada and the USA during the post WWII period (1955-1989). The empirical. investigation is conducted by means of the Johansen method of cointegration and the error correction modelling strategy. Results show that stock prices play a significant role in the determination of stationary long-run real M1 and real M2 demand functions in both countries. The direction and magnitude of the role of stock prices depends upon the definition of the money and the country. Error correction results provide evidence of causality between the real money stock and the determinants of the money demand (including real stock prices).