Income Velocity Research Articles

The Behaviour of Income Velocity in Tanzania 1967-94

The study set out to investigate empirically the behaviour income velocity in Tanzania. The model used, which incorporate the demand for money hypotheses, was estimated for four definitions of velocity, namely the income velocity of currency in circulation (V0), narrow money (V1), the broad money (V2) and the extended broad money (V3) by using the Ordinary Least Squares (OLS) three sub-periods: 1967-1982, 1983-94 and the entire period from 1967-94. The descriptive results revealed four aspects: the behaviour of the income velocity was had phases: a continuous fall in the period from 1967-78; a 'puzzling trough' in the 1979-85 period; and a cyclical pattern in the rest of the sample period. Generally, the descriptive results suggested the income velocity in Tanzania exhibited a falling pattern in the 1967-1994 period. The Econometric results were not completely conclusive on the secular behaviour of the velocity, the opportunity cost of holding money, rate of monetization, and financial development. The evidence casts doubt on the reliability of the income velocity as an input for the formulation of monetary policy in Tanzania.

Money, output and income velocity

This paper attempts to assess empirically the contribution of three structural shocks – monetary, institutional (financial and fiscal), and technological – to output and velocity fluctuations in the national bank era and the post-1973 period. To identify these shocks we impose only long–run restrictions, derived from a monetary growth model. We find that higher money growth increases (decreases) velocity in the first (second) period, depending crucially on the resulting changes in the transactions frequency. Credit–enhancing financial or expansionary fiscal shocks have a permanent positive effect on velocity and a himp–shaped effect on output, whereas technological shocks cause velocity to decrease in the short run and output to move to a permanently higher level.

Velocity and the Volatility of Unanticipated and Anticipated Money Supply in the United Kingdom

This paper uses the Granger causality method to test on United Kingdom data the relationship between income velocity and unanticipated and anticipated money supply and their respective volatilities over the period 1966–88. The results suggest that unanticipated and anticipated money supply and the volatility of these variables did not help predict income velocity and thus were not important factors in the decline in income velocity in the 1980s. [E52]

Institutional hypothesis of the long‐run income velocity of money and parameter stability of the equilibrium relationship

AbstractIt has recently been argued that when the conventional specification of M2 income velocity is extended to include proxies for two types of institutional change, as emphasized by Bordo and Jonung (1987, 1990), corresponding to the processes of monetization and increasing financial sophistication of financial developments, this extended model is stable in the sense that one can reject the null hypothesis of no cointegration against the alternative of a single cointegrating vector. There may be implications that such an equilibrium relation is a structural income velocity of money function. The evidence based on century‐long data from 1880 to 1986 presented in this paper about parameter instability of the cointegrating vector of velocity with its determinants for Canada, Norway, Sweden, and the United Kingdom casts doubt on this interpretation. The evidence is based on using formal stability tests. Moreover, it has an ‘eyeball’ support from the sequential estimates of various parameters of the cointegrating relationship including income and interest semi‐elasticities.

Friedman's Money Supply Volatility Hypothesis: Some International Evidence

Results of Granger-causality tests on data for the major industrial countries indicate that the volatility of the money supply is of little help in predicting income velocity. Results from nine industrial countries find no evidence of such a relationship in six cases and in the remaining three cases the evidence of a relationship was not found to be robust to changes in sample period. Copyright 1995 by Ohio State University Press.

Income Velocity and per Capita Income in Pakistan: 1974-75 to 1991-92

The purpose of this paper is to bring to light the effects of velocity on monetary policy during the process of development. The stated hypothesis is that if velocity declines as per-capita income increases, the monetary authorities can issue more money to finance economic growth with low rates of inflation. This short paper attempts to test the hypothesis in the post 1974 period for the present Pakistan over the period 1974-75 to 1991-92. This period corresponds to the official division of all the financial and other statistics between East and West Pakistan. The financial developments and the trends in overall economic development over the period is expected to yield results different from the studies done in the earlier period.

Factors determining the income velocity of money in a developing economy

This paper investigates the influence of different factors on income velocity of money in 23 developing countries for the 1955–88 period. The results show that inflationary expectation raises income velocity in an agricultural developing economy.

Vitesse de circulation de la monnaie et tableau économique chez les pré-classiques

In Petty, Boisguilbert and Cantillon 's works we find explanatories variables, basis of the income velocity of money and of payments frequency within monetary circuit. These concepts will be used as starting point of the elaboration of Fisher relation. Velocity of money is studied in view of adjusting quantities where the production activity, the ways and customs manage the payments practices. From the outset, money velocity explanation is social. Agents are taken into account in so far as they are the starting or coming points of monetary flows. The nature of their connections governs economic circuit. Cantillon compares monetary and real flows, he doesn't find out but explains money velocity. He studies how an extension of circuit or a modification in the synchronized agents' paiements can influence money velocity. He computes how many weeks money takes to travel through the circuit, and so does the holding agents' money. His analysis leads to an anticipation of the liquidities approach of monetary theory.

Velocity variability: Directly an interest-rate driven phenomenon

Unexpected declines in the United States M1 income velocity of money during the 1980s has received considerable attention. Some analysts argue that since the instability of velocity occurred in tandem with a “monetarist policy experiment” by the Federal Reserve, the fallacy of monetarists' policy prescriptions is now clear for all to see. Monetarists demure, arguing that the Federal Reserve never really conducted a test of monetarist policy doctrine. Rather the Federal Reserve by creating so much variability in money growth caused the velocity's dramatic declines. Hall and Noble (1987) provide evidence to support the monetarist position while Brocato and Smith (1989) offer evidence that supports the anti-monetarist view. We employ bi-variate and multi-variate tests of Granger causality to re-examine the issues. Of the variables considered—i.e., money growth variability, the money stock, the interest rate, real GNP, and the GNP implicit price deflator, the interest rate wins hands-down. That is, the interest rate Granger causes the MI income velocity of money for all samples that include some 1980s data. Nonetheless, the monetarist response may still be accurate, since money growth uncertainly helps to explain the movements m the interest rate during most of the 1980s.

Determinants of Income Velocity in the United Kingdom: Multivariate Granger Causality

Using cointegration and multivariate causality approach, this paper examines the determinants of income velocity in the United Kingdom over the period, 1973Q1–1990Q2. The results suggest that changes in interest rate, interest rate volatility, real exchange rate and money growth volatility provide information that helps predict future movements in income velocity.

Money Growth Volatility and Income Velocity in the United Kingdom

Applying Granger-type causality along with Akaike's final-prediction-error criterion on the United Kingdom data over quarterly period, 1973–1989, this paper finds no significant causal relationship between income velocity and money growth volatility, implying that the data is incompatible with Friedman's hypothesis. [E 5]

Income Velocity and Institutional Change: Some New Time Series Evidence, 1870-1986

This paper applies tests of cointegration to assess whether institutional factors, in addition to income and an interest rate, explain the long-run behavior of velocity. Over a century of annual data from five industrialized countries are used. Institutional characteristics make a significant contribution to the determination of velocity in all the countries considered. One generally rejects the hypothesis of cointegration between velocity and its traditional determinants but the same hypothesis cannot be rejected when velocity is also a function of institutional change proxies. Tests of coefficient stability also reinforce the validity of the institutional change hypothesis of velocity. Copyright 1993 by Ohio State University Press.

Currency Substitution and Financial Innovation

This paper explores the domestic effects as well as the international transmission of financial innovation. The analysis is carried out in a cash-in-advance model with two currencies and tw o goods in which income velocity is variable because of inventory-type considerations in the determination of the demand for money. The discussion emphasizes the role of currency substitution, which occur s through the interaction between the two monies in affecting the tota l amount of time devoted to transaction activities. The role of cross-border transfers of seigniorage in determining the general equilibrium effects of financial innovation is discussed. Copyright 1993 by Ohio State University Press.

Stability of Velocity in the Major Industrial Countries: A Kalman Filter Approach

Forecasting models are estimated using annual data for the income velocity of money in seven major industrial countries. The predictions are conditional on the realized value of the long-term domestic government bond rate. These forecasts did not deteriorate over the period 1980-88, 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) point to a nonconstant trend in velocity, raising questions about the assumptions required for the cointegration techniques used in other research on money demand.

Velocity and the variability of monetary growth in the United Kingdom

This paper uses the Granger-causality method to test on United Kingdom data Friedman's hypothesis (for the United States) that the volatility of monetary growth has caused the decline in income velocity. The paper concludes that for the United Kingdom the volatility of monetary growth does not cause velocity in the Granger sense.

The Velocity of M1 in the 1980s: Evidence from a Multivariate Time Series Model

The velocity of M declined in the 1980s after an upward trend over the previous twenty years. This apparent break in the process generating velocity was an important consideration in the Federal Reserve's deemphasis of M as an intermediate target in 1982. Discussion of the behavior of velocity has focused upon whether the process generating velocity underwent a shift, perhaps due to the financial innovation and deregulation in the 1980s, or whether the behavior of velocity merely reflects the underlying variability in its determinants. Tatom [34], Darby et al. [7], Stone and Thornton [33], and Rasche [30] provide summaries of this debate. No consensus has emerged on whether the process generating the velocity of M 1 shifted after 1982. The aim of the present paper is to analyze the behavior of velocity before and after 1982. The approach taken here is quite different from the traditional method of analyzing velocity which relies upon single-equation estimates of velocity or money demand functions. A vector autoregressive (VAR) model that contains the income velocity of M1 and its key economic determinants (income, interest rates, inflation, and money growth variability) is estimated using quarterly data for the period 1961:1-1981:4. The adequacy of this model is evaluated by calculating variance decompositions. A Monte Carlo simulation technique similar to that described in Doan and Litterman [8] is used to compute standard errors for the variance decompositions. This allows a judgement as to the significance of the response of velocity to its economic determinants. The effects of these variables on velocity for the period 1982:1-1988:4, the period of velocity's unusual behavior, are estimated through computation of historical decompositions. Formal stability tests are also performed to determine if there was a change in the process generating velocity after 1982.

Income velocity in China, 1953–1986

Income velocity in China, 1953–1986

Wealth, Financial Liberalization, and the Demand for Money in Japan

This paper presents estimates of a demand function for broad money in Japan. The function explains both secular trends in broad money during the 1970s and 1980s and the sharp decline in the income velocity of broad money during 1986-88. The inclusion of wealth and a measure of the return on holding broad money is essential to the specification of the money-demand function. Developments in these variables, as opposed to a behavioral shift brought about by the rapid pace of financial liberalization, explain the decline in money velocity during 1986-88.

Stability of Velocity in the Group of Seven Countries: A Kalman Filter Approach

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.

Stability of Velocity in the Group of Seven Countries: A Kalman Filter Approach

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.