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.
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