Monetary policy and the velocity of money in Greece: a cointegration approach

Abstract

Long-run real money demand and velocity functions for the narrow monetary aggregate Ml are tested by means of the cointegration approach developed by Johansen and Juselius (1990). The results support the existence of a systematic relationship between M1-velocity, the rate of interest and the exchange rate. An interesting aspect of the trivariate error correction vector autoregressive analysis is the evidence of bidirectional causality between the exchange rate and velocity. Furthermore, changes in rate of interest provide information that helps predict future movements of M1-velocity. Finally, the results derived from the Engle and Granger (1987) two-step procedure suggest that M1-velocity is subject to control through policy-induced interest rate and exchange rate movements, thus justifying the adoption of Ml as a useful monetary target.