Interrelations between the United States and the United Kingdom, 1873–1975

Abstract

This article is an excerpt from a monograph, Monetary Trends in the United States and the United Kingdom: Their Relation to Income, Prices, and Interest Rates, 1867–1975, that the University of Chicago Press has scheduled for publication in July 1982. Earlier in the monograph, we estimate a single demand curve for money for the United States and the United Kingdom, and also show that velocity in the two countries had parallel movements and that the rates of change of velocity were nearly identical in the two countries for most of the century we cover. Similar behavior of velocity in the two countries requires in addition to a largely common demand curve similar behavior of the variables affecting the demand for money. Chapter 7 from which this excerpt is taken begins by examining the interrelations between velocity in the two countries. The excerpt though self-contained is clearly incomplete. Note that the basic data are geometric averages of annual data for cycle phases (expansions or contractions) which average 2.0 years in length for the United States, 2.8 years for the United Kingdom. Rates of change ( g with a subscript for the variable) for a phase are the slopes of straight lines fitted to the logarithms of three successive phase averages (the phase in question, the prior phase, and the following phase). Money refers to currency plus adjusted demand and time deposits of commercial banks held by the public. Income refers to net national product. Nominal money ( M) or income ( Y) is income in dollars or pounds at current prices. Prices ( P) refer to the implicit price index obtained by dividing national product in current prices by national product in constant 1929 prices. Velocity ( V) is the ratio of nominal income to nominal money. Short-term interest rates refer to the US commercial paper rate and the UK rate on 3-month bank bills. Demand shift and postwar readjustment effects refer to the values of dummy variables in the demand curves for each country. These effects allow for an upward shift in the demand for money during selected phases of economic uncertainty and for readjustments in the demand for money following World Wars I and II.