The Velocity of Circulation: Some new evidence on international integration

Abstract

This study tests for the integration of money velocity movements among the major European Union countries. For this purpose, a new test is employed that allows one to confirm or reject integration on the basis of whether or not the first largest principal component, based on deviations of velocity growth rates from a base country, is stationary. Using monthly data covering the last 25 years, this study finds that integration was strongest during the 1970s and during 1983-92. These findings modify the institutionalist view that common financial developments have meant that velocities have moved together on an upward secular trend over the last 40 years. Developments with regard to currency substitution along with exchange rate policy and capital controls can affect relative interest rates and income movements and therefore the co-movements in money velocities.