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Stability of Velocity in the Group of Seven Countries: A Kalman Filter Approach

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  • Mr. Eduard J Bomhoff

Abstract

This paper estimates forecasting models using annual data for the income velocity of money in the G-7 countries. The predictions are conditional upon the realized value of the long-term domestic government bond rate. Such conditional forecasts did not deteriorate over the period 1980-1988 as compared with the earlier postwar period. Velocity of M1 is found to be very interest-elastic in almost all countries; velocity of M2 less so. The specifications (based on Kalman filters and smoothers) point to a non-constant (stochastic) trend in velocity, hence questioning the assumptions required for the cointegration techniques used in other research on the demand for money.

Suggested Citation

  • Mr. Eduard J Bomhoff, 1990. "Stability of Velocity in the Group of Seven Countries: A Kalman Filter Approach," IMF Working Papers 1990/080, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1990/080
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    Cited by:

    1. George Tawadros, 2007. "A structural time series test of the P-star model: evidence from the middle east," Applied Financial Economics, Taylor & Francis Journals, vol. 17(6), pages 463-467.
    2. Abdul Qayyum & Faiz Bilquees, 2005. "P-Star Model: A Leading Indicator of Inflation for Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 44(2), pages 117-129.
    3. Mujeri, Mustafa Kamal & Shahiduzzaman , Md & Islam, Md Ezazul, 2009. "Application of the P?Star Model for Measuring Inflationary Pressure in Bangladesh," Bangladesh Development Studies, Bangladesh Institute of Development Studies (BIDS), vol. 32(1), pages 1-22, March.

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