A cointegration analysis of the relatonship between bank reserves, deposits and loans. The case of Italy, 1965-1987^* * We wish to thank two anonymous referees for very helpful suggestions and comments on an earlier version of this paper.

In this paper we investigate the relationship between bank reserves, deposits and loans using a time series approach. The empirical results show that free reserves cointegrate with both deposits and loans and the causal nexus runs from deposits (in the short run) to reserves and from deposits and loans (in the long run) to free reserves. This reflects the fact that the Bank of Italy has never followed a policy of unconditional money stock targeting with strict monetary base control. We also find that in the short run deposits are causally prior to loans; this reflects the fact that Italian banks have mainly pursued an asset management policy. Over the full sample deposits and loans are not cointegrated; this may be due to the introduction of the ceiling on bank loans.