Abstract
Studies of the income velocity of money have often stressed the positive relationship between velocity and interest rates' and the impact of the behavior of non-bank financial institutions on velocity.2 Certain other authors have suggested that shifts in bank portfolio composition can have a destabilizing effect since these shifts can mobilize idle balances and change income velocity.3 The objective of this paper is to test empirically the hypothesis that bank portfolio composition has an impact on velocity. There are theoretical structures to support either the contention that velocity is affected by bank portfolio composition or the argument that velocity is independent of bank portfolios. The author has shown elsewhere,4 that the conceptual importance or unimportance of portfolio composition for policy lies in the theoretical monetary channel one views as the correct representation of the real world. In particular, the view, set forth by Friedman and other members of the Chicago school, argues that bank portfolio composition is irrelevant for policy while certain segments of the credit view
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