The dynamics of money velocity

Omid Ardakani

Applied Economics Letters, 2023, vol. 30, issue 13, 1814-1822

Abstract: The dynamic of money velocity has changed gradually, influencing how macroeconomic shocks affect money velocity. This paper examines the response of money velocity to the external shocks in a system of equations, where money velocity, real output growth, money growth volatility, expected inflation, and risk premium are jointly determined. The regime-switching behaviour of money velocity is then examined through a Bayesian threshold approach. The main finding suggests that money velocity drops significantly after negative output and expected inflation shocks, followed by a sudden increase. In addition, the regime-switching process distinguishes the deterministic and stochastic behaviour of money velocity.

Date: 2023
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DOI: 10.1080/13504851.2022.2083062

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