Financial Instability and Money Velocity - Evidence from the Financial Crisis

Svatopluk Kapounek and Jana Kralova Jana Kralova ()
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Jana Kralova Jana Kralova: Department of Finance, Faculty of Business and Economics, Mendel University in Brno

No 2014-44, MENDELU Working Papers in Business and Economics from Mendel University in Brno, Faculty of Business and Economics

Abstract: We focus on the financial instability hypothesis defined as rapid credit growth accompanied with a significant increase in asset prices. We used contribution of the national banking systems within the euro area and identified significant relationship between the money velocity and asset prices before the financial crisis in the year 2007. Finally, we applied cointegration analysis and weak exogeneity tests to identify causality between the money supply created by the national banking systems, economic activity and asset prices. We found heterogeneity in cointegration relations within the euro area. Our recommendations follow Post Keynesian assumptions in relation to the endogeneity of money.

Keywords: financial instability hypothesis; national contribution to the monetary aggregate; money velocity; weak exogeneity test (search for similar items in EconPapers)
JEL-codes: E12 E58 (search for similar items in EconPapers)
Pages: 15
Date: 2014-03
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