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Money and velocity during financial crises: From the great depression to the great recession

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  • Anderson, Richard G.
  • Bordo, Michael
  • Duca, John V.

Abstract

This study models the demand for a broad monetary aggregate (M2) from the Great Depression through the Great Recession. Key to the model is the interaction between a measure of time-variation in economic agents’ perceived financial risk and an index of the cost of portfolio adjustment. The finding of a useful money demand relationship suggests that skepticism regarding the indicator role of a broad, liquid money aggregate as a policy guide may be exaggerated. Further, our model provides some guidance for policymakers who face the challenge of unwinding large balance sheets as risk premia return to normal and velocity adjusts.

Suggested Citation

  • Anderson, Richard G. & Bordo, Michael & Duca, John V., 2017. "Money and velocity during financial crises: From the great depression to the great recession," Journal of Economic Dynamics and Control, Elsevier, vol. 81(C), pages 32-49.
    • Handle: RePEc:eee:dyncon:v:81:y:2017:i:c:p:32-49
    DOI: 10.1016/j.jedc.2017.03.014
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    More about this item

    Keywords

    Money demand; Financial crises; Monetary policy; Liquidity; Financial innovation;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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