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What Drives Money Velocity?

Luca Benati ()

Diskussionsschriften from Universitaet Bern, Departement Volkswirtschaft

Abstract: Since WorldWar II, permanent interest rate shocks have driven nearly all of the fluctuations of U.S. M1 velocity, which is cointegrated with the short rate, and most of the long-horizon variation in the velocity of M2-M1. Permanent velocity shocks specific to M2-M1, on the other hand, have played a minor role. Further, counterfactual simulations show that, absent permanent interest rate shocks, M1 velocity would have been broadly flat, and fluctuations in the velocity of M2-M1 would have been more subdued than they have historically been. We show that failure to distinguish between M1 and M2-M1 causes a significant distortion of the inference, erroneously pointing towards a dominant role for M2 velocity shocks.

Keywords: Money demand; structural VARs; unit roots; cointegration; longrun restrictions. (search for similar items in EconPapers)
Date: 2017-07
New Economics Papers: this item is included in nep-his, nep-mac and nep-mon
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