The Bank of Italy has published Economic History Working Paper No. 56, which empirically tests the Cambridge School of monetary theory for Italy using long-run annual data. Focusing on Pigou’s Cambridge k ratio, it finds the ratio follows a non-stationary process, challenging the notion of a stable velocity of circulation, but identifies a long-term equilibrium relationship when k is modelled jointly with nominal interest rates. The paper reviews how the Cambridge School, associated with Alfred Marshall and Arthur Cecil Pigou, built on Fisher’s quantity equation while emphasizing money’s functions beyond a means of payment and helping pave the way to later work by John Maynard Keynes. Empirically, it measures k as the sum of currency and demand deposits relative to nominal GDP and tests its relationship with nominal interest rates using Italian time series from unification in 1861 to the introduction of the euro; a cointegrating relationship is detected with two nominal non-stationary interest rates, and a Vector Error Correction Model estimated over the full sample supports the Cambridge School’s theoretical predictions.
Bank of Italy 2025-10-17
Bank of Italy publishes working paper linking the Cambridge k ratio to nominal interest rates in Italy over 1861 to the euro
The Bank of Italy's Economic History Working Paper No. 56 tests the Cambridge School of monetary theory for Italy, focusing on Pigou’s Cambridge k ratio. The study finds the ratio follows a non-stationary process, challenging the stable velocity of circulation, but identifies a long-term equilibrium relationship when modeled with nominal interest rates. Using Italian data from 1861 to the euro's introduction, the research supports the Cambridge School's theoretical predictions.