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Interest Rates and Monetary Velocity in Australia and the United States

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  • M. K. LEWIS

Abstract

Two problems have become evident in recent work on the demand for money. One is the implausibly long lags in the demand for money function, the other is a tendency for short‐run instability during the 1970s. This paper argues that these problems stem from a point raised by Milton Friedman in 1959 but neglected subsequently: namely, the failure of reference cycles in interest rates to conform in timing with cycles in velocity. The cyclical association between interest rates and velocity is examined for both Australia and the US using cross‐spectral methods, and evidence is found of the timing relationships which puzzled Friedman and led him to doubt that interest rates significantly affected the demand for money. After considering the implications of these findings, it is concluded that many models of the demand for money appear to be mis‐specified, and the two problems mentioned above are symptomatic of this. A different approach to modelling the demand for money is outlined, in which a short‐lead relationship in the money market is substituted for the long lags found by other researchers.

Suggested Citation

  • M. K. Lewis, 1978. "Interest Rates and Monetary Velocity in Australia and the United States," The Economic Record, The Economic Society of Australia, vol. 54(1), pages 111-126, April.
    • Handle: RePEc:bla:ecorec:v:54:y:1978:i:1:p:111-126
    DOI: 10.1111/j.1475-4932.1978.tb00320.x
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    References listed on IDEAS

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    Cited by:

    1. A. Petridis, 1984. "Prospects for the Australian Economy in 1984," The Economic Record, The Economic Society of Australia, vol. 60(1), pages 1-15, March.
    2. Carr, Jack & Darby, Michael R., 1981. "The role of money supply shocks in the short-run demand for money," Journal of Monetary Economics, Elsevier, vol. 8(2), pages 183-199.
    3. William Coleman, 2013. "A Young Tree Dead? The Story of Economics in Australia and New Zealand," CEPR Discussion Papers 688, Centre for Economic Policy Research, Research School of Economics, Australian National University.

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