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Money and velocity during financial crises: from the Great Depression to the Great Recession

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

Abstract

This study models the velocity (V2) of broad money (M2) since 1929, covering swings in money [liquidity] demand from changes in uncertainty and risk premia spanning the two major financial crises of the last century: the Great Depression and Great Recession. V2 is notably affected by risk premia, financial innovation, and major banking regulations. Findings suggest that M2 provides guidance during crises and their unwinding, and that the Fed faces the challenge of not only preventing excess reserves from fueling a surge in M2, but also countering a fall in the demand for money as risk premia return to normal amid velocity shifts stemming from financial reform.

Suggested Citation

  • Richard G. Anderson & Michael D. Bordo & John V. Duca, 2015. "Money and velocity during financial crises: from the Great Depression to the Great Recession," Working Papers 1503, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddwp:1503
    DOI: 10.24149/wp1503
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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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