Stability of Velocity in the Group of Seven Countries: A Kalman Filter Approach

Eduard Bomhoff

No 1990/080, IMF Working Papers from International Monetary Fund

Abstract: This paper estimates forecasting models using annual data for the income velocity of money in the G-7 countries. The predictions are conditional upon the realized value of the long-term domestic government bond rate. Such conditional forecasts did not deteriorate over the period 1980-1988 as compared with the earlier postwar period. Velocity of M1 is found to be very interest-elastic in almost all countries; velocity of M2 less so. The specifications (based on Kalman filters and smoothers) point to a non-constant (stochastic) trend in velocity, hence questioning the assumptions required for the cointegration techniques used in other research on the demand for money.

Keywords: WP; interest rate; interest rate elasticity; standard error; rank correlation; opportunity cost; income elasticity; money growth; trending interest rates; Demand for money; Personal income; Velocity of money; Monetary base; Monetary aggregates; Global (search for similar items in EconPapers)
Pages: 34
Date: 1990-09-01
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Citations: View citations in EconPapers (4)

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