Stability of Velocity in the Group of Seven Countries: A Kalman Filter Approach
September 1, 1990
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Summary
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.
Subject: Demand for money, Monetary aggregates, Monetary base, Money, National accounts, Personal income, Velocity of money
Keywords: Demand for money, Global, income elasticity, interest rate, interest rate elasticity, Monetary aggregates, Monetary base, money growth, opportunity cost, Personal income, rank correlation, standard error, trending interest rates, Velocity of money, WP
Pages:
34
Volume:
1990
DOI:
Issue:
080
Series:
Working Paper No. 1990/080
Stock No:
WPIEA0801990
ISBN:
9781451955392
ISSN:
1018-5941
Notes
Also published in Staff Papers, Vol. 38, No. 3, September 1991.
