Title: Time-varying behavior of the equilibrium velocity of money in the Euro area
Authors: Mariam Camarero - University Jaume I (Spain)
Juan Sapena - Catholic University of Valencia (Spain) [presenting]
Cecilio Tamarit - University of Valencia (Spain)
Abstract: The historical importance of money growth on inflation changes has been well established in the literature. This is the reason why the study of the stability of the money demand function is of such great importance. Nevertheless, for this function to be stable, the velocity of circulation of money should not change or, at least, its deviations from its long-run value should not be permanent. However, recent developments in inflation and in M3 velocity in the Euro area have raised serious doubts about the reliability of M3 growth as a pillar of the ECBs monetary policy strategy. We develop a very flexible and comprehensive state-space framework for modeling the velocity of circulation. Our specification allows for the estimation of different autoregressive alternatives, and include control instruments, whose coefficients can be set-up either common or idiosyncratic. This is particularly useful to detect asymmetries among individuals (countries) to common shocks.