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The velocity of US M2 in the 1990s: some further evidence

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  • Abdur Chowdhury
  • Mark Wheeler

Abstract

This paper investigates the behaviour of M2 velocity in recent years with special emphasis on the post-1989 period. Unlike previous studies in this area, M2 velocity is analysed in the context of a small vector autoregressive (VAR) model which includes income, prices, interest rates, and money growth volatility. The hypothesis of a structural shift in M2 velocity associated with the post-1989 period is rejected by the VAR model. This suggests that the unusual behaviour of M2 velocity since 1989 may be traced to the variability in its determinants, rather than to a shift in the process generating velocity. Variance decompositions indicate that real income and the short-term opportunity cost of M2 are the most important determinants of M2 velocity. The long-term opportunity cost of M2 and the return on equities also have significant impacts on M2 velocity.

Suggested Citation

  • Abdur Chowdhury & Mark Wheeler, 1999. "The velocity of US M2 in the 1990s: some further evidence," Applied Economics, Taylor & Francis Journals, vol. 31(9), pages 1137-1144.
    • Handle: RePEc:taf:applec:v:31:y:1999:i:9:p:1137-1144
    DOI: 10.1080/000368499323625
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    References listed on IDEAS

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    1. John V. Duca, 1992. "The case of the missing M2," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q II, pages 1-24.
    2. Joshua N. Feinman & Richard D. Porter, 1992. "The continuing weakness in the M2," Finance and Economics Discussion Series 209, Board of Governors of the Federal Reserve System (U.S.).
    3. Evan F. Koenig, 1993. "Searching for a stable M2-demand equation," Working Papers 9339, Federal Reserve Bank of Dallas.
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    Cited by:

    1. Assad L. Baunto & Christian Bordes & Samuel Maveyraud & Philippe Rous, 2007. "Money and uncertainty in the Philippines: A Friedmanite Perspective," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00308663, HAL.

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