Skip to main content
SpringerLink
Log in

Back to basics: The key to the velocity puzzle is M1

  • Articles
  • Published:
International Advances in Economic Research Aims and scope Submit manuscript

Abstract

The recent instability in M1 velocity can be explained by recognizing that M1 consists of two types of transactions balances: those that are used for GDP transactions and those that are used for non-GDP transactions (mainly financial transactions). A model is developed to adjust for instability in the non-GDP transactions balancesvia measurements of portfolio adjustments between M1, non-M1 deposits, and nonbank assets. The model is much better in explaining post-1980 velocity instability, implying that portfolio adjustments induced by the rapid institutional change of this period are decisive factors in determining velocity changes. Also, an explanation of recent changes in V2 and V3 can be derived from the explanation of V1 changes.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Baba, Y.; Hendry, D. F.; Starr, R. M. "The Demand for MI in the U.S.A., 1960–1988,"Review of Economic Studies, 59, 1992, pp. 25–61.

    Google Scholar 

  • Bordo, M.; Jonung, L. "The Long-run Behavior of Velocity: The Institutional Approach Revisited,"Journal of Policy Modeling, 12, Summer 1990, pp. 165–97.

    Article  Google Scholar 

  • Carlson, J.; Byrne, S. "Recent Behavior of Velocity: Alternative Measures of Money," Federal Reserve Bank of Cleveland,Economic Review, 28, 1, Quarter 1 1992, pp. 2–10.

    Google Scholar 

  • Darin, R.; Hetzel, R. L. "A Shift-Adjusted M2 Indicator For Monetary Policy," Federal Reserve Bank of Richmond,Economic Quarterly, 80, 3, Summer 1994, pp. 25–47.

    Google Scholar 

  • Greenspan, Alan, testimony before the U.S. House of Representatives, Committee on Banking, Housing, and Urban Affairs, July 20, 1993, pp. 9–10.

  • Hetzel, R. "How Useful is M2 Today?," Federal Reserve Bank of Richmond,Economic Review, 78, 5, September/October 1992, pp. 12–26.

    Google Scholar 

  • Higgins, Bryon. "Policy Implications of Recent M2 Behavior," Federal Reserve Bank of Kansas City,Economic Review, 77, 3, Quarter 3 1992, pp. 21–36.

    Google Scholar 

  • Mehra, Y. "Has M2 Demand Become Unstable?," Federal Reserve Bank of Richmond,Economic Review, 78, 5, September/October 1992, pp. 27–32.

    Google Scholar 

  • Siklos, P. L. "Income Velocity and Institutional Change: Some New Time Series Evidence, 1870 – 1986,"Journal of Money Credit and Banking, 25, 3, Part I, August 1993, pp. 377–92.

    Google Scholar 

  • Stauffer, R. "The Recent Behavior of M2 Velocity,"Atlantic Economic Journal, 21, 3, September 1993, p. 92.

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Roanoke College, USA

    Robert F. Stauffer

Authors
  1. Robert F. Stauffer
    View author publications

    You can also search for this author in PubMed Google Scholar

Rights and permissions

Reprints and permissions

About this article

Cite this article

Stauffer, R.F. Back to basics: The key to the velocity puzzle is M1. International Advances in Economic Research 2, 12–20 (1996). https://doi.org/10.1007/BF02295152

Download citation

  • Issue Date:

  • DOI: https://doi.org/10.1007/BF02295152

Keywords

Search

Navigation