- 26 -

significance level and have the right sign, i.e., the sign predicted by the model developed in the previous section.

**Table 2: Market capitalization**

||**O**|**LS**|**E**|**C**|**Mo**<br>|**dl**<br>|**Mo**|**dlb**|
|---|---|---|---|---|---|---|---|---|
|**Variables**|<br>**Coeff.**|**P-vat.**|**Coeff.**|**P-val.**|<br>**C;oeff**|**.P-val.**|**Coeff.**|**P-val.**|
|8|-1.9616|0.000|-0. 5948|0.240|-3.9841|0. 000|-3.9881|o .000|
|**_r_**|-0.7433|0.134|-0.3033|0.554|-1.6794|0.077|-1.9141|0.038|
|p|0.0629|0.047|0.0457|0.081|0.3241|0.001|0.3782|0.000|
|Cs|0.3072|0.000|0.2929|0. 0o0|<br>0.3393|0. 000|0.3112|0.000|
|**nl**|2.3509|0.000|1.8197|0.039|2.7811|0. 000|2.6174|0.000|
|**vt**|**0.** 8072|0.000|0.9108|0.000|0.8242|0.000|0.8210|0.000|
|**duml**|-0.6466|0.000|-0.6340|0. 0o0|-0.5854|0. 000|-0.5720|o .000|
|**psim**|-0.9483|0.003|-0.8804|0.001|-0.8556|0.019|-0.8692|0.023|
|**book**|||||||-0.0935|0.061|
|**constant**|**0.** 6689|0. 000|0.6947|0.000|0.5036|0.000|0.5397|0.000|
|**obs**|281||281||281||281||
|**R2/1**|0.81||0.80||0.76||0.74||
|**JS/2**|146.53|0.000|685.12|0.000|101.33|0.000|91.17|0.000|
|**HS13**|..|..|8.43|0.296|4.24|0.751|4.99|0.661|
|**RE/4**|..|..|144.45|0. o.||..|.||

Notes: In ModI and ModIb, the instruments are a function of the rate of growth of M2 and real GDP as defined in Footnote 27, the rate of change of the real effective exchange rate, the rate of growth of real per-capita GDP, a measure of dispersion of the real interest rate, and a measure of dispersion of inflation. For a description of the variables used in the regressions, see appendix. /1 The R2 statistics is relevant for the OLS regression only; for the other two regressions we report the squared correlation between fitted and actual values. /2 The joint significance test in the OLS regression is distributed as an F(8,272) while it is distributed as a Chi2(8) in the other three regressions. /3 HS is the Hausmann specification test and it is distributed as a Chi2(7). **/4** RE is the test for random effects and it is distributed as a Chi2(1).

The EC regression does not instrument the asset returns. The results show that neither the real rate of return on money nor the real interest rate are significant at the 10 percent level. We also report the Hausmann specification test and a test for random effects. In the test for random effects, we reject that the variance of the individual effects is equal to zero and hence, we reject that the data should be pooled. In the specification test, we cannot reject at the 5 percent significance level that there is significant difference between the random effect and the fixed effect estimators and hence, we cannot reject that the random effect model is misspecified.

In the Modi regression, we instrumented the endogenous variables as follows: the rate of inflation (which is included in the real rate of return of money) with the rate of growth of money plus quasi-money less the rate of growth of real GDP with the idea that prices, and hence inflation, respond to excess demand for money;27 the real interest rate with the rate of change of the real effective exchange rate, following real interest parity;<sup>28</sup> 27 Since the return on money is defined as 0 = ( --1) we transformed the rate of inflation by the l+rc rate of growth of M2 _(M 2/M 2)_ less the real growth of GDP (Y/Y), as follows: (1 +

- 1 .

28 We also tried to instrument the real interest rate using data on budget deficits assuming that countries with larger Government financing needs would have higher real interest rates and although results did not change, we had a significant loss in the number of observations. Hence, we decided not to use this variable as an instrument.