A0727
Title: The dynamics of velocity of money and money demand in the United States
Authors: Krzysztof Beck - Lazarski University (Poland) [presenting]
Abstract: In the first part of the investigation, we analyze the dynamics of velocity of money in the United States by examining M0, M1, M2, and M3 monetary aggregates within the context of the quantity theory of money. The long-run relationship implied by the quantity theory of money is estimated, allowing for time-varying velocity of money and short-run dynamics, using a Bayesian error-correction mechanism model. These changes are examined within a Markov switching VEC (MS-VEC) model and a specification that permits the cointegrating space to evolve over time in a manner comparable to the random walk variation (TVP-VEC). Using the Frobenius matrix norm, the distance between the obtained cointegration spaces and those spanned by the vectors is measured based on the money volatility reported in the Federal Reserve of Saint Louis Database. In the second part of the investigation, it is estimated how demand for money depends on interest rates, income, inflation, and expected inflation, as well as the uncertainty underlying those determinants. It is found that the volatility of money behaves very differently from the basic estimates depicted in the Federal Reserve Bank of St. Louis Database.
